CalAtlantic Group, Inc.
CalAtlantic Group, Inc. (Form: 10-K, Received: 02/29/2016 15:25:34)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 2015
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from N/A to
 
Commission file number 1-10959
CALATLANTIC GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
33-0475989
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
15360 Barranca Parkway, Irvine, California, 92618
(Address of principal executive offices, including zip code)
(949) 789-1600
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.01 par value
(and accompanying Preferred Share Purchase Rights)
 
New York Stock Exchange
6¼% Senior Notes due 2021
(and related guarantees)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was $1,310,016,860.
As of February 26, 2016, there were 121,292,793 shares of the registrant’s common stock outstanding.
Documents incorporated by reference:
Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2016 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
 
CALATLANTIC GROUP, INC.
 
INDEX
 
   
Page No.
 
PART I
 
     
Item 1.
1
Item 1A.
6
Item 1B.
15
Item 2.
15
Item 3.
16
Item 4.
16
     
 
PART II
 
     
Item 5.
17
Item 6.
19
Item 7.
20
Item 7A.
38
Item 8.
40
Item 9.
81
Item 9A.
81
Item 9B.
83
     
 
PART III
 
     
Item 10.
83
Item 11.
83
Item 12.
83
Item 13.
83
Item 14.
83
     
 
PART IV
 
     
Item 15.
84
 
 
 
 
 
 
i
 
FORWARD-LOOKING STATEMENTS
 
This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  In addition, other statements we may make from time to time, such as press releases, oral statements made by Company officials and other reports we file with the Securities and Exchange Commission, may also contain such forward-looking statements.  Forward-looking statements in this report include, but are not limited to, statements regarding:

·
our strategy;
·
the benefits of our merger with The Ryland Group, Inc.;
·
our plans to continue to use significant portions of our cash resources to make substantial investments in land and the source of funds for such investments;
·
our plans to invest in larger land parcels;
·
housing market conditions and trends in the geographic markets in which we operate;
·
the impact of future market rate risks on our financial assets and borrowings;
·
our expectation to convert year-end backlog in 2016;
·
the sufficiency of our warranty and other reserves;
·
trends in new home deliveries, orders, backlog, home pricing, leverage and gross margins;
·
the sufficiency of our liquidity to implement our strategy and our ability to access additional capital and refinance existing indebtedness;
·
litigation outcomes and related costs;
·
plans to purchase our notes prior to maturity and to engage in debt exchange transactions;
·
the effect of seasonal trends;
·
our ability to realize the value of our deferred tax assets and the timing relating thereto;
·
our plans to enhance revenue while maintaining an appropriate sales pace;
·
that we may acquire other homebuilders;
·
the market rate risks relating to our debt and investments;
·
our plans to concentrate operations and capital in growing markets;
·
amounts remaining to complete relating to existing surety bonds; and
·
the impact of recent accounting standards.

Forward-looking statements are based on our current expectations or beliefs regarding future events or circumstances, and you should not place undue reliance on these statements.  Such statements involve known and unknown risks, uncertainties, assumptions and other factors—many of which are out of our control and difficult to forecast—that may cause actual results to differ materially from those that may be described or implied.  Such factors include, but are not limited to, the risks described in this Annual Report under the heading "Risk Factors," which are incorporated by reference herein.

Except as required by law, we assume no, and hereby disclaim any, obligation to update any of the foregoing or any other forward-looking statements.  We nonetheless reserve the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this report.  No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.
 
 
 
ii
CALATLANTIC GROUP, INC.
 
PART I
 
ITEM 1.          BUSINESS
 
CalAtlantic Group, Inc., formed through the October 1, 2015 merger of Standard Pacific Corp. and The Ryland Group, Inc., two of the nation's largest and most respected homebuilders, builds well-crafted homes in thoughtfully designed communities that meet the desires of customers across the homebuilding spectrum, from entry level to luxury, in over 40 metropolitan statistical areas spanning 17 states and the District of Columbia. Also providing mortgage, title and escrow services, we are focused on providing an exceptional end-to-end homebuying experience for our customers.
The Company's homebuilding operations are divided into four reportable segments: North, Southeast, Southwest and West, consisting of the following metropolitan areas at December 31, 2015:
North Atlanta, Baltimore, Chicago, Delaware, Indianapolis, Metro Washington D.C., Minneapolis/St. Paul, New Jersey, Northern Virginia and Philadelphia
Southeast Charleston, Charlotte, Jacksonville, Orlando, Raleigh, South Florida and Tampa
Southwest Austin, Dallas, Denver, Houston, Las Vegas and San Antonio
West Bay Area (Northern California), Inland Empire (Southern California), Phoenix, Sacramento, San Diego and Southern California Coastal
The percentage of our homes delivered by region and product mix for the year ended December 31, 2015 were as follows:
State
 
Percentage of
Deliveries (1)
North
 
   11%
Southeast
 
34
Southwest
 
26
West
 
29
Total
 
100%
 
Product Mix
 
Percentage of
Deliveries (1)
Move-up / Luxury
 
   85%
Entry-level     15
Total
 
100%
The average selling prices of our homes delivered by region for the year ended December 31, 2015 were as follows:

State
Average
Selling
Price (1)
 
(Dollars in thousands)
North                                                                                                                                                    
$334
Southeast                                                                                                                                                    
$395
Southwest                                                                                                                                                  
$462
West                                                                                                                                                  
$640
        Total                                                                                                                                                     
$477
________________
(1)
Please note that the information in the foregoing tables includes nine months of stand-alone data (through September 30, 2015) for predecessor Standard Pacific Corp. and three months of combined Standard Pacific Corp. and The Ryland Group, Inc. data (from October 1, 2015 through December 31, 2015).

Dollar Value of Backlog

The dollar value of our backlog as of December 31, 2015 was $2.6 billion, or 5,611 homes.  We expect all of our backlog at December 31, 2015 to be converted to deliveries and revenues during 2016, net of cancellations.

Homebuilding Operations
With a trusted reputation for quality craftsmanship, exceptional architectural design and an outstanding customer experience earned over our 50 year history, we utilize our five decades of land acquisition, development and homebuilding expertise to acquire and build desirable communities in locations that meet the high expectations of our homebuyers.   We currently build homes in over 40 metropolitan statistical areas through a total of 26 operating divisions.  Our homes sizes typically range from approximately 1,500 to 3,500 square feet, although we have built homes from 1,100 to over 6,000 square feet.  The sales prices of our homes generally range from approximately $165,000 to over $2 million.  At December 31, 2015, we owned or controlled 70,494 homesites (including joint ventures) and had 575 active selling communities.  For the year ended December 31, 2015, approximately 86% of our deliveries were single-family detached homes.  The remainder of our deliveries were single-family attached homes, generally townhomes and condominiums configured with eight or fewer units per building.
We customize our home designs to meet the specific needs of each particular market and its customers' preferences. These preferences are reflected in every aspect of our community sales and marketing, including community locations and amenities, exterior styles, and model home merchandising.  We also offer structural and design options that allow customers to personalize their home to meet their needs and desires.

Financial Services Operations

We have a mortgage financing subsidiary that provided financing to 71% of our homebuyers who chose to finance their home purchases during 2015.  We also have a title subsidiary that provides title examination and other title and escrow related services to homebuyers in certain of our markets.  Staffed by a team of professionals experienced in the new home purchase process and our sales and escrow procedures, our financial services operations benefit our homebuyers by offering a dependable source of competitively priced financial services that are seamlessly integrated into our home sales and close process.  These operations also complement our homebuilding operations by making the timing of our new home deliveries more predictable. The loans funded by our mortgage subsidiary are generally sold in the secondary mortgage market.

Strategy

Through the October 1, 2015 merger of equals transaction between Standard Pacific Corp. and Ryland Group, Inc., we gained what we believe is important geographic and product diversification, expanding our reach and enhancing our growth prospects in the entry level, move-up and luxury market segments. While our homes span the price point spectrum, we intend to continue to focus the operations in most of our markets on serving the needs of the move-up homebuyers who we believe are more likely to value and pay for the quality construction and customer service experience that are the hallmarks of our legacy brands.

Our strategy includes the following elements:

·
acquire land in desirable locations at acceptable prices;
·
leverage our land acquisition and master plan development expertise to garner an advantage in the competitive market for highly sought after locations;
·
construct well built, innovatively designed, and energy efficient homes that cater to the way people live today and that are the preferred choice of homebuyers, from entry level through luxury;
·
provide an exceptional customer experience;
·
optimize the size of our business in each of our markets to appropriately leverage operating efficiencies;
·
maintain a cost structure that positions us for near and long-term profitability;
·
seek opportunities to enhance revenue while maintaining an appropriate sales pace; and
·
concentrate operations and invested capital in anticipated growth markets.
 
Marketing and Sales
Our homes are marketed through a variety of channels, including through individual communities where new homes are sold by local sales teams. At the community level, home shoppers have the opportunity to experience fully-furnished and landscaped model homes that demonstrate the livability of our floorplans. Our forward-thinking architectural philosophy is a key differentiator in marketing to the homebuyers we target. We closely examine buyer preferences communicated to our sales team and through buyer surveys. This research, coupled with the skilled expertise of architects who have both domestic and international experience, provides our homebuyer thoughtful solutions that cater to the way people live today through innovative ideas and practical conveniences.
Many buyers begin or supplement their buying process via online research, which allows us to engage and inform them through a robust website and a wide array of digital marketing initiatives. Brokers and real estate professionals are a viable extension of our sales team and we market to them directly.
Our homes are sold pursuant to written sales contracts that usually require the homebuyer to make a cash deposit.  We sell both pre-built and to-be-built homes.  The majority of our homebuyers have the opportunity to purchase various optional amenities and upgrades such as prewiring and electrical options, upgraded flooring, cabinets, finished carpentry and countertops, varied interior and exterior color schemes, additional and upgraded appliances, and some alternative room configurations. Purchasers are typically permitted for a limited time to cancel their contracts if they fail to qualify for financing. In some cases, purchasers are also permitted to cancel their contract if they are unable to sell their existing homes or if certain other conditions are not met. A buyer's liability to us for wrongfully terminating a sales contract is typically limited to the forfeiture of the buyer's cash deposit to the Company, although some states provide for more limited remedies.
Seasonality and Longer Term Cycles

Our homebuilding operations have historically experienced seasonal fluctuations. We typically experience the highest new home order activity in the spring and summer months, although new order activity is highly dependent on the number of active selling communities and the timing of new community openings as well as other market factors. Because it typically takes us four to six months to construct a new home, we typically deliver a greater number of homes in the second half of the calendar year as spring and early summer orders are converted to home deliveries. As a result, our revenues and cash flows (exclusive of the amount and timing of land purchases) from homebuilding operations are generally higher in the second half of the calendar year, particularly in the fourth quarter.
 
Our homebuilding operations are also subject to longer term business cycles, the severity, duration, beginning and ending of which are difficult to predict. At the high point of this business cycle, the demand for new homes and new home prices are at their peak. Land prices also tend to be at their peak in this phase of the cycle. At the low point in the cycle, the demand for homes is weak and land prices tend to be more favorable. While difficult to accomplish, our goal is to deliver as many homes as possible near the top of the cycle and to make significant investments in land at the bottom of the cycle.
 
We believe we were at or near the bottom of the current cycle for the several years prior to 2012 and, as such, made substantial investments in land.  We plan to continue to make substantial investments in land, which is likely to utilize a significant portion of our cash resources, so long as we believe that such investments will yield results that meet our investment criteria.

Competitive Conditions in the Business

The homebuilding industry is fragmented and highly competitive. We compete with numerous other residential construction companies, including large national and regional firms, for customers, land, financing, raw materials, skilled labor, and employees. We compete for customers primarily on the basis of home design and location, price, customer satisfaction, construction quality, reputation, and the availability of mortgage financing. While we compete with other residential construction companies for customers, we also compete with resales of existing homes and rental properties.

Financing
We typically use both our equity (including internally generated funds from operations and proceeds from public and private equity offerings and proceeds from the exercise of stock options) and debt financing in the form of bank debt and note offerings, to fund land acquisition and development and construction of our properties.  To a lesser extent, we use seller financing to fund the acquisition of land and, in some markets, community facility district or other similar assessment district bond financing is used to fund community infrastructure such as roads and sewers.
We also utilize joint ventures and option arrangements with land sellers, other builders and developers as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, leveraging our capital base and managing the financial and market risk associated with land holdings.  In addition to equity contributions made by us and our partners, our joint ventures typically will obtain secured project specific financing to fund the acquisition of land and development and construction costs.  For more detailed discussion of our current joint venture arrangements please see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Off-Balance Sheet Arrangements".
Development and Construction

We customarily acquire unimproved or improved land zoned for residential use.  To control larger land parcels or gain access to highly desirable parcels, we sometimes form land development joint ventures with third parties that provide us the right to acquire from the joint venture a portion of the lots when developed.  If we purchase raw land or partially developed land, we will perform development work that may include negotiating with governmental agencies and local communities to obtain any necessary zoning, environmental and other regulatory approvals and permits, and constructing, as necessary, roads, water, sewer and drainage systems and recreational facilities like parks, community centers, pools, hiking and biking trails.  With our long California heritage of creating master planned communities, we have expertise and experience in handling complex development opportunities.

We act as a general contractor with our supervisory employees coordinating most of the development and construction work on a project.  Independent architectural design, engineering and other consulting firms are generally engaged on a project-by-project basis to assist in project planning and community and home design, and subcontractors are engaged to perform all of the physical development and construction work.  Although the construction time for our homes varies from project to project depending on geographic region, the time of year, the size and complexity of the homes, local labor situations, the governmental approval processes, availability of materials and supplies, and other factors, we typically complete the construction of a home in approximately four to six months, with a current average cycle time of approximately five months.

Sources and Availability of Raw Materials

We, either directly or indirectly through our subcontractors, purchase drywall, cement, steel, lumber, insulation and the other building materials necessary to construct a home.  While these materials are generally widely available from a variety of sources, from time to time we experience serious material shortages on a localized basis, particularly during periods where the regions in which we operate experience natural disasters that have a significant impact on existing residential and commercial structures and during periods of robust sales activity when there is high demand for construction materials.   During these periods, the prices for these materials can substantially increase and our construction process can be slowed.

Government Regulation

For a discussion of the impact of government regulations on our business, including the impact of environmental regulations, please see the risk factors included under the heading "Regulatory Risks" in the Risk Factors section.

Financial Services

Customer Financing

As part of our ongoing operations, we provide mortgage loans to many of our homebuyers through our mortgage financing subsidiary, CalAtlantic Mortgage.  Our mortgage subsidiary's principal sources of revenue are fees generated from loan originations, net gains on the sale of loans and net interest income earned on loans during the period we hold them prior to sale.  In addition to being a source of revenues, our mortgage operations benefit our homebuyers and complement our homebuilding operations by offering a dependable source of competitively priced financing, staffed by a team of professionals experienced in the new home purchase process and our sales and escrow procedures, all of which help to make our new home deliveries more predictable .

We sell substantially all of the loans we originate in the secondary mortgage market, with servicing rights released on a non-recourse basis.  These sales are generally subject to our obligation to repay the gain on sale if the loan is prepaid by the borrower within a certain time period following such sale, or to repurchase the loan if, among other things, the loan purchaser's underwriting guidelines are not met or there is fraud in connection with the loan.  We record reserves for loan- related claims when we determine it is appropriate to do so.
For a portion of our loan originations, we manage the interest rate risk associated with making loan commitments to our customers and holding loans for sale by preselling loans.  Preselling loans consists of obtaining commitments (subject to certain conditions) from third party investors to purchase the mortgage loans while concurrently extending interest rate locks to loan applicants.  Before completing the sale to these investors, our mortgage subsidiary finances these loans under its mortgage credit facilities for a short period of time (typically for 30 to 45 days), while the investors complete their administrative review of the applicable loan documents.  While preselling these loans reduces our risk, we remain subject to risk relating to purchaser non-performance, particularly during periods of significant market turmoil.
We also originate a portion of our mortgage loans on a non-presold basis.  When originating mortgage loans on a non-presold basis, we lock interest rates with our customers and fund loans prior to obtaining purchase commitments from third party investors, thereby creating interest rate risk.  To hedge this interest rate risk, our mortgage subsidiary enters into forward sale commitments of mortgage-backed securities.  Loans originated in this manner are typically held by our mortgage subsidiary and financed under its mortgage credit facilities for a short period of time (typically for 30 to 45 days) before the loans are sold to third party investors.  Our mortgage subsidiary utilizes third party hedging software to assist with the execution of its hedging strategy for loans originated on a non-presold basis.  While this hedging strategy is designed to assist in mitigating risk associated with originating loans on a non-presold basis, these instruments involve elements of market risk related to fluctuations in interest rates that could result in losses on loans originated in this manner and we remain subject to risk relating to purchaser non-performance, particularly during periods of significant market turmoil.
Title and Escrow Services

Our title and escrow subsidiaries provide title and escrow services to homebuyers in many of our markets.  We are in the process of expanding this business and, consequently, the level of title and escrow services we currently provide in any particular market vary, ranging from full title and escrow services in certain geographies to limited title examination services in others.  

Employees

At December 31, 2015, we had approximately 2,850 employees, up from approximately 1,250 employees at the prior year end.  Of our employees at the end of 2015, approximately 725 were executive, administrative and clerical personnel, 1,000 were sales and marketing personnel, 725 were involved in construction and project management, 125 were involved in new home warranty, and 275 worked in the financial services operations.  None of our employees are covered by collective bargaining agreements, although employees of some of the subcontractors that we use are represented by labor unions and may be subject to collective bargaining agreements.  We believe that our relations with our employees and subcontractors are good.

Business Segment Financial Data

For business segment financial data, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as Note 4 to our consolidated financial statements.

Availability of Reports

This annual report on Form 10-K and each of our quarterly reports on Form 10-Q and current reports on Form 8-K, including any amendments, are available free of charge on our website, www.calatlantichomes.com , as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC"). The information contained on our website is not incorporated by reference into this report and should not be considered part of this report.  In addition, the SEC website contains reports, proxy and information statements, and other information about us at www.sec.gov .

Company Information
In connection with our October 1, 2015 merger with Ryland Group, Inc., we changed our name from Standard Pacific Corp. to CalAtlantic Group, Inc.  We were incorporated in the State of Delaware in 1991 and our common stock is listed on the New York Stock Exchange (NYSE: CAA).  Through our predecessors, we commenced our homebuilding operations in 1965. Our principal executive offices are located at 15360 Barranca Parkway, Irvine, California 92618. Unless the context otherwise requires, the terms "we," "us," "our" and "the Company" refer to CalAtlantic Group, Inc. and its predecessors and subsidiaries.
ITEM 1A.         RISK FACTORS
 
The discussion of our business and operations included in this annual report on Form 10-K should be read together with the risk factors set forth below.  They describe various risks and uncertainties to which we are or may become subject.  These risks and uncertainties, as well as other risks which we cannot foresee at this time, have the potential to affect our business, financial condition, results of operations, cash flows, strategies and prospects in a material and adverse manner.
 
Risks related to us and our business

Market and Economic Risks

Adverse economic conditions negatively impact the demand for homes.  A negative change in economic conditions could have adverse effects on our operating results and financial condition.

The homebuilding industry is sensitive to changes in economic conditions such as the level of employment, consumer confidence, consumer income, availability of financing and interest rate levels. From approximately 2007 to 2011, the national recession, credit market disruption, high unemployment levels, the absence of home price stability, and the decreased availability of mortgage financing, among other factors, adversely impacted the homebuilding industry and our operations and financial condition.  Although the housing market has recovered in most of the geographies in which we operate, if market conditions deteriorate, our results of operations and financial condition could be adversely impacted.
The market value and availability of land may fluctuate significantly, which could decrease the value of our developed and undeveloped land holdings and limit our ability to develop new communities.
The risk of owning developed and undeveloped land can be substantial for us. Our strategy calls for us to continue to invest a substantial portion of our cash in land.  The market value of the undeveloped land, buildable lots and housing inventories we hold can fluctuate significantly as a result of changing economic and market conditions. During the national recession, we experienced negative economic and market conditions that resulted in the impairment of a significant number of our land positions and write-offs of some of our land option deposits. If economic or market conditions deteriorate in the future, we may have to impair our land holdings and projects, write down our investments in unconsolidated joint ventures, write off option deposits, sell homes or land at a loss, and/or hold land or homes in inventory longer than planned. In addition, inventory carrying costs (such as property taxes and interest) can be significant, particularly if inventory must be held for longer than planned, which can trigger asset impairments in poorly performing projects or markets. As we increase the amount of land we hold, we also increase our exposure to the risks associated with owning land, which means that if economic and market conditions were to deteriorate, it could have a significantly greater adverse impact on our financial condition.
Our long-term success also depends in part upon the continued availability of suitable land at acceptable prices. The availability of land for purchase at acceptable prices depends on a number of factors outside of our control, including the risk of competitive over-bidding of land prices and restrictive governmental regulation. If a sufficient amount of suitable land opportunities do not become available, it could limit our ability to develop new communities, increase our land costs and negatively impact our sales and earnings.
Customers may be unwilling or unable to purchase our homes at times when mortgage-financing costs are high or when credit is difficult to obtain.
The majority of our homebuyers finance their new home purchase. In general, housing demand is adversely affected by increases in interest rates and by decreases in the availability of mortgage financing. While interest rates remain near historic lows, the Federal Reserve Board recently commenced a program to increase interest rates and it is widely anticipated that rates will likely continue to increase over the next several years.  In addition, underwriting standards remain tight, with lenders requiring high credit scores, substantial down payments and cash reserves, and the availability of subprime and other alternative mortgage products, which are important to sales in many of our markets, remains limited. The availability of mortgage financing is also affected by changes in liquidity in the secondary mortgage market and the market for mortgage-backed securities, which are directly impacted by the federal government's decisions regarding its financial support of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, the entities that provide liquidity to the secondary market. If the availability and cost of mortgage financing deteriorates, the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes could be adversely affected, which could adversely affect our operating results and profitability.
The homebuilding industry is competitive and the business practices of homebuilders and other home sellers have the potential to negatively impact our sales and earnings.
The homebuilding industry is fragmented and highly competitive. We compete with numerous other residential construction companies, including large national and regional firms, for customers, land, financing, raw materials, skilled labor and employees. We compete for customers primarily on the basis of home design and location, price, customer satisfaction, construction quality, reputation, and the availability of mortgage financing. We also compete with resales of existing homes and rental properties and with several larger competitors who, because of their scale, may have lower costs of capital, labor, materials and overhead.  Decisions made by competitors to reduce home sales prices and/or increase the use of sales incentives (which may be easier to do for larger competitors with lower cost structures or necessary for distressed sellers) may require us to do the same to maintain our sales pace, which will harm our financial results.
Labor and material shortages and price fluctuations could delay or increase the cost of home construction and reduce our sales and earnings.
The residential construction industry experiences serious labor and material shortages from time to time, including shortages in qualified tradespeople, and supplies of insulation, drywall, cement, steel and lumber. These labor and material shortages can be more severe during periods of strong demand for housing or during periods where the regions in which we operate experience natural disasters that have a significant impact on existing residential and commercial structures. The cost of material may also be adversely affected during periods of shortage or high inflation. The cost of labor may be adversely affected by shortages of qualified tradespeople such as carpenters, roofers, electricians and plumbers, changes in laws relating to union activity and changes in immigration laws and trends in labor migration.  During the national recession, a large number of qualified tradespeople went out of business or otherwise exited our markets. The reduction in available tradespeople is currently exacerbating labor shortages as demand for new housing has increased. From time to time, we have experienced volatile price swings in the cost of labor and materials, including in particular the cost of lumber, cement, steel and drywall. Shortages and price increases could cause delays in and increase our costs of home construction, which in turn could harm our operating results and profitability.
We may be unable to obtain suitable bonding for the development of our communities.
We are often required to provide bonds to governmental authorities and others to ensure the completion of our projects. If we are unable to obtain the required surety or performance bonds for our projects, our business operations and revenues could be adversely affected. From time to time, when market conditions become unfavorable, surety providers become reluctant to issue new bonds and some providers request credit enhancements (such as cash deposits or letters of credit) in order to maintain existing bonds or to issue new bonds. If we are unable to obtain required bonds in the future, or are required to provide credit enhancements with respect to our current or future bonds, our liquidity could be negatively impacted.

High cancellation rates may negatively impact our business.

In connection with the sale of a home we collect a deposit from the homebuyer that is a small percentage of the total purchase price.  The deposit may, in certain circumstances, be fully or partially refundable to our homebuyer prior to closing, depending on, among other things, the laws of the state in which the home is located.  If the prices for our homes in a given community decline, competitors increase sales incentives, interest rates increase, the availability of mortgage financing tightens or a buyer experiences a change in their personal finances, they may have an incentive to cancel their home purchase contracts with us, even where they might be entitled to no refund or only a partial refund of this deposit.  Significant cancellations could have a material adverse effect on our business.

Operational Risks

Our longer-term land acquisition strategy poses significant risks.
From time-to-time, we purchase land parcels with longer-term time horizons when we believe market conditions provide an opportunity to purchase this land at acceptable prices.  We plan to continue to invest a substantial portion of our cash in land, including in larger land parcels with longer holding periods that will require significant development operations. This strategy is subject to a number of risks. It is difficult to accurately forecast development costs and sales prices the longer the time horizon for a project and, with a longer time horizon, there is a greater chance that unanticipated development cost increases, changes in general market conditions and other adverse unanticipated changes could negatively impact the profitability of a project. In addition, larger land parcels are generally undeveloped and typically do not have all (or sometimes any) of the governmental approvals necessary to develop and construct homes. If we are unable to obtain these approvals or obtain approvals that restrict our ability to use the land in ways we do not anticipate, the value of the parcel will
be negatively impacted. In addition, the acquisition of land with a longer term development horizon historically has not been a significant focus of our business in many of our markets and may therefore be subject to greater execution risk.
Severe weather, other natural conditions or disasters and climate change may disrupt or delay construction.
Severe weather and other natural conditions or disasters, such as earthquakes, landslides, hurricanes, tornadoes, droughts, floods, heavy or prolonged rain or snow, and wildfires can negatively affect our operations by requiring us to delay or halt construction or to perform potentially costly repairs to our projects under construction and to unsold homes. Some scientists believe that the rising level of carbon dioxide in the atmosphere is leading to climate change and that climate change is increasing the frequency and severity of weather related disasters. If true, we may experience increasing negative weather related impacts to our operations in the future.
 
We are subject to product liability and warranty claims arising in the ordinary course of business, which can be costly.
As a homebuilder, we are subject to construction defect and home warranty claims arising in the ordinary course of business. These claims are common in the homebuilding industry and can be costly. While we maintain product liability insurance and generally seek to require our subcontractors and design professionals to indemnify us for some portion of the liabilities arising from their work, there can be no assurance that these insurance rights and indemnities will be collectable or adequate to cover any or all construction defect and warranty claims for which we may be liable. For example, contractual indemnities can be difficult to enforce, we are often responsible for applicable self-insured retentions (particularly in markets where we include our subcontractors on our general liability insurance and as a result our ability to seek indemnity for insured claims is significantly limited or nonexistent), certain claims may not be covered by insurance or may exceed applicable coverage limits, and one or more of our insurance carriers could become insolvent. Additionally, the coverage offered by and availability of product liability insurance for construction defects is limited and costly. There can be no assurance that coverage will not be further restricted, become more costly or even unavailable.
In addition, we conduct a material portion of our business in California, one of the most highly regulated and litigious jurisdictions in the United States, which imposes a ten year, strict liability tail on most construction liability claims. As a result, our potential losses and expenses due to litigation, new laws and regulations may be greater than our competitors who have smaller California operations.
A major safety incident relating to our business could be costly in terms of potential liabilities and reputational damage.
Building sites are inherently dangerous, and operating in the homebuilding industry poses certain inherent health and safety risks. Due to health and safety regulatory requirements and the number of projects we work on, health and safety performance is critical to the success of all areas of our business. Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements, and a failure that results in a major or significant health and safety incident could expose us to liability that could be costly. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation, our relationships with relevant regulatory agencies or governmental authorities, and our ability to attract customers, which in turn could have a material adverse effect on our business, financial condition and operating results.
We rely on subcontractors to construct our homes and, in many cases, to obtain, building materials. The failure of our subcontractors to properly construct our homes, or to obtain suitable building materials, may be costly.
We engage subcontractors to perform the actual construction of our homes, and in many cases, to obtain the necessary building materials. Despite our quality control efforts, we may discover that our subcontractors were engaging in improper construction practices or installing defective materials in our homes. When we discover these issues we repair the homes in accordance with our new home warranty standards and as required by law. The cost of satisfying our warranty and other legal obligations in these instances may be significant and we may be unable to recover the cost of repair from subcontractors, suppliers and insurers.
Our mortgage subsidiary may become obligated to repurchase loans it has sold in the secondary mortgage market or may become subject to borrower lawsuits.
While our mortgage subsidiary generally sells the loans it originates within a short period of time in the secondary mortgage market on a non-recourse basis, this sale is subject to an obligation to repurchase the loan or to make a "make-whole" payment if, among other things, the purchaser's underwriting guidelines are not met or there is fraud in connection with the loan.  It is possible that our mortgage subsidiary will be required to fund make-whole payments and/or repurchase loans in the future as the holders of defaulted loans scrutinize loan files to seek reasons to require us to do so. Further, future
make-whole payments could have a higher severity than those previously experienced. In such cases our current reserves might prove to be inadequate and we would be required to use additional cash and take additional charges to reflect the higher level of repurchase and make-whole activity, which could harm our financial condition and results of operations.
We are dependent on the services of key employees and the loss of any substantial number of these individuals or an inability to hire additional personnel could adversely affect us.
Our success is dependent upon our ability to attract and retain skilled employees, including personnel with significant management and leadership skills. Competition for the services of these individuals in many of our operating markets can be intense and has increased as market conditions have improved. If we are unable to attract and retain skilled employees, we may be unable to accomplish the objectives set forth in our business plan.
We may not be able to successfully identify, complete and integrate acquisitions, which could harm our profitability and divert management resources.
We may from time to time acquire other homebuilders or related businesses. Successful acquisitions require us to correctly identify appropriate acquisition candidates and to integrate acquired operations and management with our own. Should we make an error in judgment when identifying an acquisition candidate, should the acquired operations not perform as anticipated, or should we fail to successfully integrate acquired operations and management, we will likely fail to realize the benefits we intended to derive from the acquisition and may suffer other adverse consequences. Acquisitions involve a number of other risks, including the diversion of the attention of our management and corporate staff from operating our existing business, potential charges to earnings in the event of any write-down or write-off of goodwill and other assets recorded in connection with acquisitions and exposure to the acquired company's pre-existing liabilities. We can give no assurance that we will be able to successfully identify, complete and integrate acquisitions.
Our failure to maintain the security of our electronic and other confidential information could expose us to liability and materially adversely affect our financial condition and results of operations; Information technology failures could harm the Company's business
Privacy, security, and compliance concerns have continued to increase as technology has evolved. As part of our normal business activities, we collect and store certain confidential information, including personal information of homebuyers/borrowers and information about employees, vendors and suppliers. This information is entitled to protection under a number of regulatory regimes. We may share some of this information with vendors who assist us with certain aspects of our business, particularly our mortgage and title businesses. Our failure to maintain the security of the data which we are required to protect, including via the penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also result in deterioration in customers confidence in us and other competitive disadvantages, and thus could have a material adverse impact on our financial condition and results of operations.
In addition, our information technology systems are dependent upon global communications providers, Web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced significant systems failures and electrical outages in the past. While we take measures to ensure our major systems have redundant capabilities, our systems are susceptible to outages from fire, floods, power loss, telecommunications failures, break-ins, cyber attacks and similar events. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions resulting from unauthorized tampering with our computer systems. The occurrence of any of these events could disrupt or damage our information technology systems and hamper our internal operations, our ability to provide services to our customers and the ability of our customers to access our information technology systems. A material network breach in the security of our information technology systems could include the theft of our intellectual property or trade secrets. As a result, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Negative publicity could adversely affect our reputation and our business, financial results and stock price.
Unfavorable media related to our industry, company, brand, personnel, operations, business performance, or prospects may impact our stock price and the performance of our business, regardless of its accuracy or inaccuracy. The speed at which negative publicity is disseminated has increased dramatically through the use of electronic communication, including social media outlets, websites, and blogs. Our success in maintaining and expanding our brand image depends on our ability to adapt to this rapidly changing media environment. Adverse publicity or negative commentary from any media outlets could damage our reputation and reduce the demand for our homes, which would adversely affect our business.

Regulatory Risks

We are subject to extensive government regulation, which can increase costs and reduce profitability.
Our homebuilding operations, including land development activities, are subject to extensive federal, state and local regulation, including environmental, building, employment and worker health and safety, zoning and land use regulation. This regulation affects all aspects of the homebuilding process and can substantially delay or increase the costs of homebuilding activities, even on land for which we already have approvals. During the development process, we must obtain the approval of numerous governmental authorities that regulate matters such as:
·
permitted land uses, levels of density and architectural designs;
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the level of energy efficiency our homes are required to achieve;
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the level of greenhouse emissions relating to our operations and the homes we build;
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the installation of utility services, such as water and waste disposal;
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the dedication of acreage for open space, parks, schools and other community services; and
·
the preservation of habitat for endangered species and wetlands, storm water control and other environmental matters.
 
The approval process can be lengthy, can be opposed by consumer or environmental groups, and can cause significant delays or permanently halt the development process. Delays or a permanent halt in the development process can cause substantial increases to development costs or cause us to abandon the project and to sell the affected land at a potential loss, which in turn could harm our operating results.
In addition, new housing developments are often subject to various assessments or impact fees for schools, parks, streets, highways and other public improvements. The costs of these assessments are subject to substantial change and can cause increases in the effective prices of our homes, which in turn could reduce our sales and/or profitability.
There continues to be a variety of energy related legislation being considered for enactment around the world. For instance, for the last several years, the federal congress has considered an array of energy related initiatives, from carbon "cap and trade" to a federal energy efficiency building code that would increase energy efficiency requirements for new homes between 30 and 50 percent. If all or part of this proposed legislation, or similar legislation, were to be enacted, the cost of home construction could increase significantly, which in turn could reduce our sales and/or profitability.
Much of this proposed legislation is in response to concerns about climate change. As climate change concerns grow, legislation and regulatory activity of this nature is expected to continue and become more onerous. Similarly, energy related initiatives will impact a wide variety of companies throughout the world and because our operations are heavily dependent on significant amounts of raw materials, such as lumber, steel, and concrete, these initiatives could have an indirect adverse effect on our operations and profitability to the extent the suppliers of our materials are burdened with expensive cap and trade and similar energy related regulations.
Our mortgage operations are also subject to federal, state, and local regulation, including eligibility requirements for participation in federal loan programs and various consumer protection laws. Our title insurance agency operations are subject to state insurance and other laws and regulations. Failure to comply with these requirements can lead to administrative enforcement actions, the loss of required licenses and other required approvals, claims for monetary damages or demands for loan repurchase from investors, and rescission or voiding of the loan by the consumer.
Increased regulation of the mortgage industry could harm our future sales and earnings.
The mortgage industry remains under intense scrutiny and continues to face increasing regulation at the federal, state and local level. Changes in regulation have negatively impacted the full spectrum of mortgage related activity. Potential changes to federal laws and regulations could have the effect of limiting the activities of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, the entities that provide liquidity to the secondary mortgage market, which could lead to increases in mortgage interest rates. At the same time, the Federal Housing Administration's rules regarding Borrower FICO scores, down payment amounts, and limiting the amount of permitted seller concessions, lessen the number of buyers able to finance a new home. All of these regulatory activities reduce the number of potential buyers who qualify for the financing necessary to purchase our homes, which could harm our future sales and earnings.
Changes to tax laws could make homeownership more expensive.
Current tax laws generally permit significant expenses associated with owning a home, primarily mortgage interest expense and real estate taxes, to be deducted for the purpose of calculating an individual's federal, and in many cases, state, taxable income. If the federal or state governments were to change applicable tax law to eliminate or reduce these benefits for all or certain classes of taxpayers, the after-tax cost of owning a home could increase significantly. This would harm our future sales and earnings.
States, cities and counties in which we operate may adopt slow growth or no growth initiatives reducing our ability or increasing our costs to build in these areas, which could harm our future sales and earnings.
Several states, cities and counties in which we operate have in the past approved, or approved for inclusion on their ballot, various "slow growth" or "no growth" initiatives and other ballot measures that could negatively impact the land we own as well as the availability of additional land and building opportunities within those localities. Approval of slow or no growth measures would increase the cost of land and reduce our ability to open new home communities and to build and sell homes in the affected markets and would create additional costs and administrative requirements, which in turn could harm our future sales and earnings.

Financing Risks

We may need additional funds, and if we are unable to obtain these funds, we may not be able to operate our business as planned.
Our operations require significant amounts of cash. Our requirements for additional capital, whether to finance operations or to service or refinance our existing indebtedness, fluctuate as market conditions and our financial performance and operations change. We cannot assure you that we will maintain cash reserves and generate sufficient cash flow from operations in an amount to enable us to service our debt or to fund other liquidity needs. Additionally, while we have a $750 million unsecured revolving credit facility designed to provide us with an additional source of liquidity to meet short-term cash needs, our ability and capacity to borrow under the facility is limited by our ability to meet the covenants of the facility.
The availability of additional capital, whether from private capital sources (including banks) or the public capital markets, fluctuates as our financial condition and market conditions in general change. There may be times when the private capital sources and the public debt or equity markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would not be able to access capital from these sources. In addition, a weakening of our financial condition or deterioration in our credit ratings could adversely affect our ability to obtain necessary funds. Even if available, additional financing could be costly or have adverse consequences. If additional funds are raised through the issuance of stock, dilution to stockholders could result. If additional funds are raised through the incurrence of debt, we will incur increased debt servicing costs and may become subject to additional restrictive financial and other covenants. We can give no assurance as to the terms or availability of additional capital. If we are not successful in obtaining or refinancing capital when needed, it could adversely impact our ability to operate our business effectively, which could reduce our sales and earnings, and adversely impact our financial position.
We may be unable to meet the conditions contained in our debt instruments that must be satisfied to incur additional indebtedness and make restricted payments.
Our debt instruments impose restrictions on our operations, financing, investments and other activities. For example, our outstanding 2016 notes prohibit us from incurring additional debt, except for limited categories of indebtedness (including up to $1.1 billion in bank credit facility debt), if we do not satisfy either a maximum leverage ratio or a minimum interest coverage ratio. The 2016 notes also limit our ability to make restricted payments (including dividends, stock repurchases, distributions on stock and contributions to joint ventures), prohibiting such payments unless we satisfy one of the ratio requirements for the incurrence of additional debt and comply with a basket limitation (as defined in the indenture). As of December 31, 2015, we were able to satisfy the conditions necessary to incur additional debt and to make restricted payments. However, we have in the past been unable to satisfy these conditions and there can be no assurance that we will be able to satisfy these conditions in the future. If we are unable to satisfy these conditions in the future, we will be precluded from incurring additional borrowings, subject to certain exceptions, and will be precluded from making restricted payments, other than through funds available from our unrestricted subsidiaries.
We have substantial debt and may incur additional debt; leverage may impair our financial condition and restrict our operations and prevent us from fulfilling our obligations under our debt instruments.
We currently have a substantial amount of debt. As of December 31, 2015, the principal amount of our homebuilding senior notes outstanding was approximately $3,380.5 million, $280.0 million of which matures in 2016, $1,030.0 million of which matures between 2017 and 2018, $567.5 million of which matures between 2019 and 2020 and $1,503.0 million of which matures between 2021 and 2032.  In addition, the instruments governing our debt permit us to incur significant additional debt.  Our existing debt and any additional debt we incur could:
·
make it more difficult for us to satisfy our obligations under our existing debt instruments;
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increase our vulnerability to general adverse economic and industry conditions;
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limit our ability to obtain additional financing to fund land acquisitions and construction and development activities, particularly when the availability of financing in the capital markets is limited;
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require a substantial portion of our cash flows from operations for the payment of interest on our debt, reducing our ability to use our cash flows to fund working capital, land acquisitions and land development, acquisitions of other homebuilders and related businesses and other general corporate requirements;
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
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place us at a competitive disadvantage to less leveraged competitors.

Servicing our debt will require a significant amount of cash, and our ability to generate sufficient cash depends on many factors, some of which are beyond our control.
Our ability to make payments on and refinance our debt and to fund planned capital expenditures depends on our ability to generate cash flow in the future. To some extent, this is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to pay our debt or to fund other liquidity needs. As a result, we may need to refinance all or a portion of our debt on or before maturity. We cannot assure you that we will be able to refinance any of our debt on favorable terms, if at all. Any inability to generate sufficient cash flow or refinance our debt on favorable terms could have a material adverse effect on our financial condition.
In addition, our 1.25% Convertible Senior Notes due 2032 (the "Convertible Notes") entitle holders to require us to repurchase their notes at a price of 100% of the principal amount, plus accrued and unpaid interest, on August 1, 2017, 2022 or 2027, or in the event of a fundamental change (as defined in the indenture governing the Convertible Notes).  If we do not have sufficient funds to repurchase notes when we are required to do so, or if instruments governing debt we have incurred prohibit us from using cash or other assets for that purpose, we might be unable to meet our obligations. Our failure to repurchase the Convertible Notes at a time when their repurchase is required by the indenture would constitute a default under the indenture.  A default under the Convertible Notes indenture, or the fundamental change itself, could also lead to a default under our revolving credit facility or other debt securities we have issued or could cause borrowings we have incurred to become due.  If the repayment of a substantial amount of indebtedness were to be accelerated after any applicable notice or grace period, we might not have sufficient funds to repay the indebtedness and repurchase the notes.
We currently have significant amounts invested in unconsolidated joint ventures with independent third parties in which we have less than a controlling interest. These investments are highly illiquid and have significant risks.
We participate in unconsolidated homebuilding and land development joint ventures with independent third parties in which we have less than a controlling interest.  At December 31, 2015, we had an aggregate of $132.8 million invested in these joint ventures, of which only two joint ventures had project specific debt outstanding, which totaled $33.7 million.  This joint venture debt is non-recourse to us.
While these joint ventures provide us with a means of accessing larger and/or more desirable land parcels and lot positions, they are subject to a number of risks, including the following:
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Restricted Payment Risk.     Certain of our senior notes prohibit us from making restricted payments, including investments in joint ventures, when we are unable to meet either a maximum leverage condition or a minimum interest coverage condition and when making such a payment will cause us to exceed a basket limitation. As a result, when we are unable to meet these conditions, payments to satisfy our joint venture obligations must be made through funds available from our unrestricted subsidiaries. If we become unable to fund our joint venture obligations
 
 
this could result in, among other things, defaults under our joint venture operating agreements, loan agreements, and credit enhancements.   And, our failure to satisfy our joint venture obligations could also affect our joint venture's ability to carry out its operations or strategy which could impair the value of our investment in the joint venture.
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Entitlement Risk.     Certain of our joint ventures acquire parcels of unentitled raw land. If the joint venture is unable to timely obtain entitlements at a reasonable cost, project delay or even project termination may occur resulting in an impairment of the value of our investment.
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Development Risk.     The projects we build through joint ventures are often larger and have a longer time horizon than the typical project developed by our wholly-owned homebuilding operations. Time delays associated with obtaining entitlements, unforeseen development issues, unanticipated labor and material cost increases, higher carrying costs, and general market deterioration and other changes are more likely to impact larger, long-term projects, all of which may negatively impact the profitability of these ventures and our proportionate share of income.
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Financing Risk.     There are generally a limited number of sources willing to provide acquisition, development and construction financing to land development and homebuilding joint ventures.  During difficult market conditions, it may be difficult or impossible to obtain financing for our joint ventures on commercially reasonable terms, or to refinance existing borrowings as such borrowings mature. As a result, we may be required to contribute our corporate funds to the joint venture to finance acquisition and development and/or construction costs following termination or step-down of joint venture financing that the joint venture is unable to restructure, extend, or refinance with another third party lender. In addition, our ability to contribute our funds to or for the joint venture may be limited if we do not meet the restricted payment condition discussed above.
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Contribution Risk.     Under credit enhancements that we typically provide with respect to joint venture borrowings, we and our partners could be required to make additional unanticipated investments in these joint ventures, either in the form of capital contributions or loan repayments, to reduce such outstanding borrowings. We may have to make additional contributions that exceed our proportional share of capital if our partners fail to contribute any or all of their share. While in most instances we would be able to exercise remedies available under the applicable joint venture documentation if a partner fails to contribute its proportional share of capital, our partner's financial condition may preclude any meaningful cash recovery on the obligation.
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Completion Risk.     We often sign a completion agreement in connection with obtaining financing for our joint ventures. Under such agreements, we may be compelled to complete a project even if we no longer have an economic interest in the property.
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Illiquid Investment Risk.     We lack a controlling interest in our joint ventures and therefore are generally unable to compel our joint ventures to sell assets, return invested capital, require additional capital contributions or take any other action without the vote of at least one or more of our venture partners. This means that, absent partner agreement, we may not be able to liquidate our joint venture investments to generate cash.
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Partner Dispute.     If we have a dispute with one of our joint venture partners and are unable to resolve it, a buy-sell provision in the applicable joint venture agreement could be triggered or we may otherwise pursue a negotiated settlement involving the unwinding of the venture and it is possible that litigation between us and our partner(s) could result. In such cases, we may sell our interest to our partner or purchase our partner's interest. If we sell our interest, we will forgo the profit we would have otherwise earned with respect to the joint venture project and may be required to forfeit our invested capital and/or pay our partner to release us from our joint venture obligations. If we are required to purchase our partner's interest, we will be required to fund this purchase, as well as the completion of the project, with corporate level capital and to consolidate the joint venture project onto our balance sheet, which could, among other things, adversely impact our liquidity, our leverage and other financial conditions or covenants.
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Consolidation Risk.     The accounting rules for joint ventures are complex and the decision as to whether it is proper to consolidate a joint venture onto our balance sheet is fact intensive. If the facts concerning an unconsolidated joint venture were to change and a triggering event under applicable accounting rules were to occur, we might be required to consolidate previously unconsolidated joint ventures onto our balance sheet which could adversely impact our leverage and other financial conditions or covenants.
 
        At times, such as now, when we are pursuing a longer-term land acquisition strategy, we become directly subject to some of these risks in varying degrees, including those discussed above related to entitlement, development, financing,
 
completion and illiquid investment. Increasing our direct exposure to these types of risks could have a material adverse effect on our financial position or results or operations.
Risks Relating to the October 1, 2015 Merger of Standard Pacific Corp. and The Ryland Group, Inc.
The integration of Standard Pacific and Ryland is difficult and disruptive to our day-to-day business and, if we are unable to integrate successfully,   many of the anticipated benefits of combining Standard Pacific and Ryland may not be realized.
The post-merger integration is a significant burden on management and our other internal resources. The diversion of management attention away from day-to-day business concerns and difficulties encountered in the transition and integration process could adversely affect our financial results. We entered into the merger with the expectation that the transaction would result in various benefits, including, among other things, operating efficiencies. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether the businesses of Standard Pacific and Ryland can be integrated in an efficient and effective manner. It is possible that the integration process could take longer than anticipated and could result in the loss of valuable employees, the disruption of each company's ongoing businesses, processes and systems or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the merger. Our results of operations could also be adversely affected by any issues attributable to Ryland's operations that arose or are based on events or actions that occurred prior to the closing of the merger. We may have difficulty addressing possible differences in corporate cultures and management philosophies. The integration process is subject to a number of uncertainties, and no assurance can be given that the anticipated benefits will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected net income and could adversely affect our future business, financial condition, operating results and prospects.
The post-merger integration process is difficult on employees and may result in our loss of key personnel.
Post-merger employee retention and recruitment may be particularly challenging, as employees and prospective employees experience uncertainty about their future roles with us as we progress through the integration process. If, despite our retention and recruiting efforts, key employees depart or prospective key employees fail to accept employment with us because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us, our financial results could be adversely affected. The loss of the services of key employees and skilled workers and their experience and knowledge regarding our business could adversely affect our future operating results and the successful ongoing operation of our business.
We may incur substantial additional costs in connection with the post-merger integration.
We expect to incur substantial costs and fees associated with the post-merger integration of Standard Pacific and Ryland and additional unanticipated costs may also be incurred. Although we expect that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of the two businesses, will offset the incremental merger-related costs over time, this net benefit may not be achieved in the near term, or at all.
Our future results will suffer if we do not effectively manage our expanded operations now that the merger has been completed.
As a result of the merger, the size of our business has increased significantly beyond the previous size of either Standard Pacific's or Ryland's business. Our future success depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that we will be successful or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the merger.
We changed our name in connection with the merger, requiring us to launch branding initiatives that involve substantial costs and may not be favorably received by customers.

Following completion of the merger, we decided to operate under the name CalAtlantic Group, Inc. As a result, in connection with this new name, we are incurring substantial costs in rebranding our products and services, and we may not be able to achieve or maintain brand name recognition or status under the new brand that is comparable to the recognition and status previously enjoyed by Standard Pacific and Ryland separately. The failure of our rebranding initiative could adversely affect our ability to attract and retain customers, which could cause us not to realize some or all of the benefits we expect to result from the completion of the transactions.

Other Risks

Our principal stockholder has the ability to exercise significant influence over the composition of our Board of Directors and matters requiring stockholder approval.
As of December 31, 2015, MP CA Homes LLC held 35% of the voting power of our voting stock. Pursuant to the amended stockholders' agreement that we entered into with MP CA Homes LLC, effective October 1, 2015, MP CA Homes LLC is entitled to designate up to two directors to serve on our Board of Directors so long as they hold at least 20% of our voting power and one director so long as they hold at least 10% of our voting power, giving MP CA Homes LLC the ability to exercise significant influence on the composition and actions of our Board of Directors. In addition, this large voting block may have a significant or decisive effect on the approval or disapproval of matters requiring approval of our stockholders, including any amendment to our certificate of incorporation, any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. The interests of MP CA Homes LLC in these other matters may not always coincide with the interests of our other stockholders. In addition, the ownership of such a large block of our voting power and the right to designate directors by MP CA Homes LLC may discourage someone from making a significant equity investment in us, even if we needed the investment to operate our business, or could be a significant factor in delaying or preventing a change of control transaction that other stockholders may deem to be in their best interests.
Our charter, bylaws, stockholders' rights agreement and debt covenants could prevent a third party from acquiring us or limit the price that investors might be willing to pay for shares of our common stock.
Provisions of the Delaware General Corporation Law, our certificate of incorporation and our bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions could delay or prevent a change in control of and could limit the price that investors might be willing to pay in the future for shares of our common stock.
Our certificate of incorporation also authorizes our Board of Directors to issue new series of common stock and preferred stock without stockholder approval. Depending on the rights and terms of any new series created, and the reaction of the market to the series, rights of existing stockholders could be negatively affected. For example, subject to applicable law, our Board of Directors could create a series of common stock or preferred stock with preferential rights to dividends or assets upon liquidation, or with superior voting rights to our existing common stock. The ability of our Board of Directors to issue these new series of common stock and preferred stock could also prevent or delay a third party from acquiring us, even if doing so would be beneficial to our stockholders.
We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits Delaware corporations from engaging in business combinations specified in the statute with an interested stockholder, as defined in the statute, for a period of three years after the date of the transaction in which the person first becomes an interested stockholder, unless the business combination is approved in advance by a majority of the independent directors or by the holders of at least two-thirds of the outstanding disinterested shares. The application of Section 203 of the Delaware General Corporation Law could also have the effect of delaying or preventing a change of control of us.
We also have a stockholders' rights agreement that could make it difficult to acquire us without the approval of our Board of Directors. Our stockholders' rights agreement has been filed with and is publicly available at or from the SEC; see Part IV, Item 15.
 
In addition, some of our debt covenants contained in the indentures for our outstanding public notes and our revolving credit facility may delay or prevent a change in control. Our outstanding notes contain change of control provisions that give the holders of our outstanding notes the right to require us to purchase the notes upon a change in control triggering event at a purchase price equal to 101% of the principal amount of the notes plus accrued and unpaid interest.  In addition, a change of control is an event of default under our revolving credit facility.
 
ITEM 1B.         UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.          PROPERTIES
 
We lease office facilities for our homebuilding and mortgage operations.  We also lease our corporate headquarters, which is located in Irvine, California.  The lease on this facility, which also includes offices for our Orange County division, consists of approximately 39,000 square feet and expires in August 2016.  We lease approximately 40 other properties for
 
our other division offices, mortgage operations and design centers.  For information about land owned or controlled by us for use in our homebuilding activities, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
 
ITEM 3.          LEGAL PROCEEDINGS

Various claims and actions that we consider normal to our business have been asserted and are pending against us. We do not believe that any of such claims and actions will have a material adverse effect upon our results of operations or financial position.
 
ITEM 4.          MINE SAFETY DISCLOSURES

None.
 
Executive Officers of the Registrant
 
Our executive officers' ages, positions and brief accounts of their business experience as of February 26, 2016, are set forth below.
 
Name
Age
Position
Scott D. Stowell
58
Executive Chairman
Larry T. Nicholson
58
Chief Executive Officer and President
Peter G. Skelly
52
Executive Vice President and Chief Operating Officer
Jeff J. McCall
44
Executive Vice President and Chief Financial Officer
Wendy L. Marlett
52
Executive Vice President and Chief Marketing Officer
John P. Babel
45
Executive Vice President, General Counsel and Secretary
 
Scott D. Stowell has served as Executive Chairman since October 2015.  Prior to that, Mr. Stowell served as Chief Executive Officer of Standard Pacific from January 2012 to September 2015 and President of Standard Pacific from March 2011 to September 2015.  From May 2007 to March 2011, Mr. Stowell served as Chief Operating Officer of Standard Pacific.  Mr. Stowell joined Standard Pacific in 1986 as a project manager.  Since March 2014, Mr. Stowell has also served as a member of the Board of Directors of Pacific Mutual Holding Company.

Larry T. Nicholson has served as Chief Executive Officer and President since October 2015.  Prior to that Mr. Nicholson served as Chief Executive Officer of Ryland from June 2009 to September 2015 and President of Ryland from October 2008 to September 2015.  From June 2007 to May 2009, Mr. Nicholson served as Chief Operating Officer of Ryland and Vice President of Ryland and President of their Southeast Region from 2004 to May 2007.  Mr. Nicholson held various operational and leadership positions since joining Ryland in 1996.

Peter G. Skelly has served as Executive Vice President and Chief Operating Officer since October 2015.  Prior to that, Mr. Skelly served as Executive Vice President and Chief Operating Officer of Ryland from 2013 to September 2015.  Prior to that, Mr. Skelly served as Senior Vice President of Ryland and President of their Homebuilding Operations from 2011 to 2013 and Senior Vice President of Ryland and President of Ryland's North/West Region from 2008 to 2011.  Mr. Skelly joined Ryland in 1998 as Assistant Controller.

Jeff J. McCall has served as Executive Vice President and Chief Financial Officer since June 2011.  Prior to joining Standard Pacific, Mr. McCall was Chief Financial Officer – Americas at Regus plc, the world's largest provider of serviced offices, from August 2004 to May 2011.  From December 2003 to August 2004 Mr. McCall served as Chief Financial Officer and Executive Vice President of HQ Global Workplaces, Inc., which was acquired by Regus plc in August 2004.  From 1998 to 2003, Mr. McCall was Principal at Casas, Benjamin & White LLC, a leading boutique advisory services firm specializing in middle market mergers, acquisitions, divestitures, restructuring, and private equity investments.
 
Wendy L. Marlett has served as Executive Vice President and Chief Marketing Officer since September 2010.  Ms. Marlett leads all of the Company's sales, marketing and communication functions across our operations.  Prior to joining Standard Pacific, Ms. Marlett was Senior Vice President of sales, marketing and communications at KB Home, where she held progressive roles since 1995 and was a recognized innovator in marketing and brand management.  From 1990 to 1995 she served in marketing and media relations positions for Rockwell International's automotive, printing and aerospace businesses.

John P. Babel has served as Executive Vice President, General Counsel and Secretary since February 2012.  Prior to that Mr. Babel served as Senior Vice President, General Counsel and Secretary of Standard Pacific from February 2009 until February 2012.  Mr. Babel joined Standard Pacific as Associate General Counsel in October 2002.  Prior to joining Standard Pacific, Mr. Babel was a corporate lawyer with the international law firm of Gibson, Dunn & Crutcher LLP.

PART II
 
ITEM 5.          MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our shares of common stock are listed on the New York Stock Exchange under the symbol "CAA."  The following table sets forth, for the fiscal quarters indicated, the reported high and low intra-day sales prices per share of our common stock as reported on the New York Stock Exchange Composite Tape and the common dividends paid per share.  On October 1, 2015, we completed a one-for-five reverse stock split.  All prior period stock prices have been restated to reflect such reverse stock split.
 
     
 
Year Ended December 31,
     
2015
 
2014
     
High
 
Low
 
Dividend
 
High
 
Low
 
Dividend
Quarter Ended
                                   
March 31
 
$
 45.70
 
$
 32.60
 
$
 ―
 
$
 46.00
 
$
 39.75
 
$
 ―
June 30
   
 45.95
   
 38.95
   
 ―
   
 43.75
   
 37.75
   
 ―
September 30
   
 46.75
   
 38.95
   
 ―
   
 44.05
   
 37.25
   
 ―
December 31
   
 43.24
   
 36.23
   
 0.04
   
 40.85
   
 34.30
   
 ―
 
For further information on our dividend policy, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

As of February 26, 2016, the number of record holders of our common stock was approximately 2,250.

Issuer Purchases of Equity Securities

We did not repurchase any shares of our common stock during the three months ended December 31, 2015.



The following graph shows a five-year comparison of cumulative total returns to stockholders of the Company, as compared with the Standard & Poor's 500 Composite Stock Index and the Dow Jones Industry Group-U.S. Home Construction Index.  The graph assumes reinvestment of all dividends.
 
Comparison of Five-Year Cumulative Total Stockholders' Return
Among CalAtlantic Group, Inc., The Standard & Poor's 500 Composite Stock Index and
the Dow Jones Industry Group-U.S. Home Construction Index
 

The above graph is based upon common stock and index prices calculated as of year-end for each of the last five calendar years.  The Company's common stock closing price on December 31, 2015 was $37.92 per share.  The stock price performance of the Company's common stock depicted in the graph above represents past performance only and is not necessarily indicative of future performance.

ITEM 6.          SELECTED FINANCIAL DATA
 
The following should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K.  On October 1, 2015, we completed a one-for-five reverse stock split.  All prior period share and per share amounts have been restated to reflect such reverse stock split.  Effective December 31, 2015, we early adopted ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03").  ASU 2015-03 was retrospectively applied to the financial statements and as such, homebuilding other assets and homebuilding debt for all periods presented have been adjusted accordingly.  Please see Note 2.w. of our accompanying consolidated financial statements.
 
     
Year Ended December 31,
 
   
2015 (1)
   
2014
   
2013
   
2012
   
2011
 
    (Dollars in thousands, except per share amounts)  
Revenues:
                   
Homebuilding
 
$
3,496,411
   
$
2,411,178
   
$
1,914,609
   
$
1,236,958
   
$
882,993
 
Financial Services
   
43,702
     
25,320
     
25,734
     
21,769
     
11,286
 
Total revenues
 
$
3,540,113
   
$
2,436,498
   
$
1,940,343
   
$
1,258,727
   
$
894,279
 
                                         
Pretax income (loss):
                                       
Homebuilding (2)
 
$
325,550
   
$
340,121
   
$
246,269
   
$
67,645
   
$
(18,156
)
Financial Services
   
16,939
     
9,843
     
11,429
     
10,542
     
1,683
 
Pretax income (loss)
 
$
342,489
   
$
349,964
   
$
257,698
   
$
78,187
   
$
(16,473
)
                                         
Net income (loss) (3)
 
$
213,509
   
$
215,865
   
$
188,715
   
$
531,421
   
$
(16,417
)
                                         
Basic income (loss) per common share
 
$
2.51
   
$
2.94
   
$
2.59
   
$
7.59
   
$
(0.24
)
                                         
Diluted income (loss) per common share
 
$
2.26
   
$
2.68
   
$
2.36
   
$
7.21
   
$
(0.24
)
                                         
Weighted average common shares outstanding:
                                       
Basic
   
71,713,747
     
55,737,548
     
50,623,649
     
40,390,760
     
38,781,943
 
Diluted
   
81,512,953
     
63,257,082
     
58,234,791
     
44,103,780
     
38,781,943
 
                                         
Weighted average additional common shares outstanding
                                       
  if preferred shares converted to common shares:
   
13,135,814
     
17,562,557
     
22,165,311
     
29,562,557
     
29,562,557
 
                                         
Total weighted average diluted common shares outstanding
                                       
  if preferred shares converted to common shares:
   
94,648,767
     
80,819,639
     
80,400,102
     
73,666,337
     
68,344,500
 
                                         
Balance Sheet and Other Financial Data:
                                       
Homebuilding cash (including restricted cash)
 
$
187,066
   
$
218,650
   
$
376,949
   
$
366,808
   
$
438,157
 
Inventories owned
 
$
6,069,959
   
$
3,255,204
   
$
2,536,102
   
$
1,971,418
   
$
1,477,239
 
Total assets
 
$
8,345,505
   
$
4,151,639
   
$
3,637,552
   
$
3,087,268
   
$
2,178,408
 
Homebuilding debt
 
$
3,487,699
   
$
2,113,301
   
$
1,815,042
   
$
1,516,212
   
$
1,302,973
 
Financial services debt
 
$
303,422
   
$
89,413
   
$
100,867
   
$
92,159
   
$
46,808
 
Stockholders' equity
 
$
3,861,436
   
$
1,676,688
   
$
1,468,960
   
$
1,255,816
   
$
623,754
 
Stockholders' equity per common share (4)
 
$
31.84
   
$
30.47
   
$
26.46
   
$
29.45
   
$
16.02
 
Pro forma stockholders' equity per common share (5)
 
$
31.84
   
$
23.10
   
$
20.10
   
$
17.39
   
$
9.11
 
Cash dividends declared per share
 
$
0.04
   
$
   
$
   
$
   
$
 
                                         
Operating Data (excluding unconsolidated joint ventures):
                                       
Deliveries
   
7,237
     
4,956
     
4,602
     
3,291
     
2,528
 
Average selling price
 
$
477
   
$
478
   
$
413
   
$
362
   
$
349
 
Net new orders (homes)
   
7,163
     
4,967
     
4,898
     
4,014
     
2,795
 
Backlog (homes)
   
5,611
     
1,711
     
1,700
     
1,404
     
681
 
Average active selling communities
   
299
     
182
     
166
     
155
     
152
 
________________
(1)
2015 full year results include Ryland's operations since October 1, 2015. Please see Note 3 of our accompanying consolidated financial statements.
(2)
Homebuilding pretax income (loss) for 2011 includes pretax impairment charges totaling $13.2 million.
(3)
Net income for 2012 includes a $454 million income tax benefit resulting from the reversal of a portion of our deferred tax asset valuation allowance.
(4)
At December 31, 2011, common shares outstanding exclude 0.8 million shares issued under a share lending facility related to our 6% convertible senior subordinated notes issued September 28, 2007.  On October 11, 2012, the remaining 0.8 million shares outstanding under the share lending facility were returned to us and no shares under the share lending facility remain outstanding.  In addition, at December 31, 2012, 2011, common shares outstanding exclude 29.6 million common equivalent shares issued during the year ended December 31, 2008 in the form of preferred stock to MP CA Homes LLC, an affiliate of MatlinPatterson Global Advisers LLC ("MP CA Homes").  On May 20, 2013, MP CA Homes converted 36,600 shares of our preferred stock into 12 million shares of our common stock.  As a result, at December 31, 2014 and 2013, common shares outstanding exclude 17.6 million common equivalent shares issuable upon conversion of preferred shares outstanding.  In addition, on October 1, 2015, MP CA Homes converted its remaining 53,565 shares of our preferred stock into 17.6 million shares of our common stock in connection with our merger with Ryland Group, Inc., and no common equivalent shares issuable upon conversion of preferred shares were outstanding at December 31, 2015.
(5)
At December 31, 2012 and 2011, pro forma common shares outstanding include 29.6 million common equivalent shares issuable upon conversion of preferred shares outstanding.  As a result of the conversion of preferred shares by MP CA Homes described above, at December 31, 2014 and 2013, pro forma common shares outstanding include 17.6 million common equivalent shares issuable upon conversion of preferred shares outstanding.  In addition, at December 31, 2011, pro forma common shares outstanding exclude 0.8 million shares issued under the share lending facility related to our 6% convertible senior subordinated notes.

ITEM 7.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the section "Selected Financial Data" and our consolidated financial statements and the related notes included elsewhere in this Form 10-K.  On October 1, 2015, we completed a one-for-five reverse stock split.  All prior period share and per share amounts have been restated to reflect such reverse stock split.
 
Results of Operations
Selected Financial Information
 
     
Year Ended December 31,
 
   
2015
   
2014
   
2013
 
     
(Dollars in thousands, except per share amounts)
 
Homebuilding:
           
Home sale revenues
 
$
3,449,047
   
$
2,366,754
   
$
1,898,989
 
Land sale revenues
   
47,364
     
44,424
     
15,620
 
Total revenues
   
3,496,411
     
2,411,178
     
1,914,609
 
Cost of home sales
   
(2,676,666
)
   
(1,748,954
)
   
(1,431,797
)
Cost of land sales
   
(43,274
)
   
(43,841
)
   
(13,616
)
Total cost of sales
   
(2,719,940
)
   
(1,792,795
)
   
(1,445,413
)
Gross margin
   
776,471
     
618,383
     
469,196
 
Gross margin percentage
   
22.2
%
   
25.6
%
   
24.5
%
Selling, general and administrative expenses
   
(390,710
)
   
(275,861
)
   
(230,691
)
Income (loss) from unconsolidated joint ventures
   
1,966
     
(668
)
   
949
 
Other income (expense)
   
(62,177
)
   
(1,733
)
   
6,815
 
Homebuilding pretax income
   
325,550
     
340,121
     
246,269
 
Financial Services:
                       
Revenues
   
43,702
     
25,320
     
25,734
 
Expenses
   
(26,763
)
   
(15,477
)
   
(14,305
)
    Financial services pretax income
   
16,939
     
9,843
     
11,429
 
Income before taxes
   
342,489
     
349,964
     
257,698
 
Provision for income taxes
   
(128,980
)
   
(134,099
)
   
(68,983
)
Net income
   
213,509
     
215,865
     
188,715
 
Less: Net income allocated to preferred shareholder
   
(32,997
)
   
(51,650
)
   
(57,386
)
Less: Net income allocated to unvested restricted stock
   
(369
)
   
(297
)
   
(265
)
Net income available to common stockholders
 
$
180,143
   
$
163,918
   
$
131,064
 
                         
Income per common share:
                       
Basic
 
$
2.51
   
$
2.94
   
$
2.59
 
Diluted
 
$
2.26
   
$
2.68
   
$
2.36
 
                         
Weighted average common shares outstanding:
                       
Basic
   
71,713,747
     
55,737,548
     
50,623,649
 
Diluted
   
81,512,953
     
63,257,082
     
58,234,791
 
                         
Weighted average additional common shares outstanding
                       
if preferred shares converted to common shares:
   
13,135,814
     
17,562,557
     
22,165,311
 
                         
Total weighted average diluted common shares outstanding
                       
if preferred shares converted to common shares:
   
94,648,767
     
80,819,639
     
80,400,102
 
                         
Net cash provided by (used in) operating activities
 
$
(271,361
)
 
$
(362,397
)
 
$
(154,216
)
Net cash provided by (used in) investing activities
 
$
184,674
   
$
(31,020
)
 
$
(143,857
)
Net cash provided by (used in) financing activities
 
$
60,888
   
$
242,519
   
$
314,809
 
Adjusted Homebuilding EBITDA (1)
 
$
648,313
   
$
502,423
   
$
401,961
 
________________  
(1)
Adjusted Homebuilding EBITDA means net income (plus cash distributions of income from unconsolidated joint ventures) before (a) income taxes, (b) homebuilding interest expense, (c) expensing of previously capitalized interest included in cost of sales, (d) impairment charges and deposit write-offs, (e) gain (loss) on early extinguishment of debt, (f) homebuilding depreciation and amortization, including amortization of capitalized model costs, (g) amortization of stock-based compensation, (h) income (loss) from unconsolidated joint ventures and (i) income (loss) from financial services subsidiary. Other companies may calculate Adjusted Homebuilding EBITDA (or similarly titled measures) differently. We believe Adjusted Homebuilding EBITDA information is useful to management and investors as it provides perspective on the underlying performance of the business. However, it should be noted that Adjusted Homebuilding EBITDA is not a U.S. generally accepted accounting principles ("GAAP") financial measure. Due to the significance of the GAAP components excluded, Adjusted Homebuilding EBITDA should not be considered in isolation or as an alternative to net income or any other performance measure prescribed by GAAP.


Selected Financial Information (continued)
 
(1)
Continuted
 
The table set forth below reconciles net income, calculated and presented in accordance with GAAP, to Adjusted Homebuilding EBITDA.

    
Year Ended December 31,
 
   
2015
   
2014
   
2013
 
    
(Dollars in thousands)
 
             
Net income
 
$
213,509
   
$
215,865
   
$
188,715
 
Provision for income taxes
   
128,980
     
134,099
     
68,983
 
Homebuilding interest amortized to cost of sales and interest expense
   
139,381
     
123,112
     
121,778
 
Homebuilding depreciation and amortization
   
40,987
     
27,209
     
21,795
 
Amortization of stock-based compensation
   
15,624
     
8,469
     
9,015
 
EBITDA
   
538,481
     
508,754
     
410,286
 
Add:
                       
Cash distributions of income from unconsolidated joint ventures
   
2,830
     
1,875
     
3,375
 
Merger-related purchase accounting adjustments included in cost of home sales
   
64,170
     
     
 
Merger and other one-time costs
   
61,737
     
     
 
Less:
                       
Income (loss) from unconsolidated joint ventures
   
1,966
     
(668
)
   
949
 
Income from financial services subsidiaries
   
16,939
     
8,874
     
10,751
 
Adjusted Homebuilding EBITDA
 
$
648,313
   
$
502,423
   
$
401,961
 


Recent Developments
October 1, 2015 Closing of Merger Transaction with The Ryland Group, Inc.; Supplemental Pro Forma Information
On October 1, 2015, Standard Pacific Corp. completed its merger transaction with The Ryland Group, Inc. ("Ryland"), with Standard Pacific Corp. continuing as the surviving corporation.  At the same time: (i) the Company changed its name to "CalAtlantic Group, Inc." and effected a reverse stock split such that each five shares of common stock of the Company issued and outstanding immediately prior to the closing of the merger were combined and converted into one issued and outstanding share of common stock, (ii) MP CA Homes, LLC, the sole owner of the Company's outstanding Series B Preferred Stock, converted all of its preferred stock to common stock, and (iii) each outstanding share of Ryland common stock, stock options and restricted stock units were converted into the right to receive, or the option to acquire, as applicable, 1.0191 shares of common stock.  Cash was paid in lieu of all fractional shares.  Because the closing of the merger occurred on the first day of the Company's fourth quarter, the discussion under the heading "CalAtlantic Discussion and Analysis of Actual Results in 2015, 2014 and 2013" includes for the 2015 period nine months of stand-alone data (through September 30, 2015) for predecessor Standard Pacific Corp. and three months of combined Standard Pacific Corp. and The Ryland Group, Inc. data (from October 1, 2015 through December 31, 2015).  To aid readers with 2015 over 2014 comparability for the entire merged business, we also are including limited supplemental pro forma information in this Management's Discussion and Analysis of Financial Conditions and Results of Operations.

Selected Pro Forma 2015 CalAtlantic to Pro Forma CalAtlantic 2014

This supplemental pro forma information is a combination of selected full year 2014 and 2015 Standard Pacific and Ryland financial and operating data.  The following unaudited selected condensed combined pro forma data combines the historical home sale revenues, homes delivered, net new orders, backlog and average active selling communities of Standard Pacific and Ryland, giving effect to the merger as if it had been consummated on January 1, 2014.  The selected condensed combined pro forma financial data are presented for illustrative purposes only, and are not necessarily indicative of results that actually would have occurred or that may occur in the future had the merger with Ryland been completed on January 1, 2014.  Accordingly this information should not be relied upon for purposes of making any investment or other decisions.
 
           Year Ended December 31,
         
 
2015
 
 
2014
 
% Change
         
(Dollars in thousands)
Pro forma home sale revenues
               
 
North
 
 $
923,541
 
 $
899,357
 
3%
 
Southeast
   
 1,345,025
   
 1,154,688
 
16%
 
Southwest
   
 1,442,100
   
 1,325,097
 
9%
 
West
   
 1,569,631
   
 1,543,579
 
2%
     
Consolidated total
 
 $
 5,280,297
 
 $
 4,922,721
 
7%
 
              Year Ended December 31, 
           2015    2014    % Change  
           Homes     ASP    Homes     ASP    Homes     ASP
         
(Dollars in thousands)
Pro forma new homes delivered:
                                   
 
North
   
 2,727
 
$
 339
   
 2,711
 
$
 332
   
1%
   
2%
 
Southeast
   
 3,732
   
 360
   
 3,664
   
 315
   
2%
   
14%
 
Southwest
   
 3,552
   
 406
   
 3,636
   
 364
   
(2%)
   
12%
 
West
 
 
 2,549
 
 
 616
 
 
 2,622
 
 
 589
 
 
(3%)
 
 
5%
   
Consolidated total
 
 
 12,560
 
$
 420
 
 
 12,633
 
$
 390
 
 
(1%)
 
 
8%
                                           
Pro forma net new orders:
                                   
 
North
   
 2,757
 
$
 339
   
 2,664
 
$
 338
   
3%
   
0%
 
Southeast
   
 3,976
   
 369
   
 3,627
   
 331
   
10%
   
11%
 
Southwest
   
 4,029
   
 413
   
 3,784
   
 377
   
6%
   
10%
 
West
 
 
 3,089
 
 
 602
 
 
 2,560
 
 
 587
 
 
21%
 
 
3%
   
Consolidated total
 
 
 13,851
 
$
 428
 
 
 12,635
 
$
 398
 
 
10%
 
 
8%
 
         
At December 31,
         
2015
 
2014
 
% Change
         
Homes
 
Dollar
Value
 
Homes
 
Dollar
Value
 
Homes
 
Dollar
Value
         
(Dollars in thousands)
Pro forma backlog:
                                   
 
North
   
 1,003
 
$
 348,285
   
 973
 
$
 337,784
   
3%
   
3%
 
Southeast
   
 1,621
   
 702,388
   
 1,378
   
 549,584
   
18%
   
28%
 
Southwest
   
 1,902
   
 845,499
   
 1,426
   
 599,654
   
33%
   
41%
 
West
 
 
 1,085
 
 
 675,920
 
 
 551
 
 
 348,380
 
 
97%
 
 
94%
   
Consolidated total
 
 
 5,611
 
$
 2,572,092
 
 
 4,328
 
$
 1,835,402
 
 
30%
 
 
40%
 
          Year Ended December 31, 
         
2015
 
2014
 
% Change
Pro forma average number of selling
           
  communities during the period:
           
 
North
 
117
 
109
 
7%
 
Southeast
 
 173
 
 155
 
12%
 
Southwest
 
 183
 
 155
 
18%
 
West
 
 85
 
 75
 
13%
   
Consolidated total
 
 558
 
 494
 
13%

 
CalAtlantic Discussion and Analysis of Actual Results in 2015, 2014 and 2013

Overview

The Company's 2015 results reflect a continuation of the housing market recovery and our focus on the execution of our strategy.  Despite the inevitable distraction to our business caused by the activities associated with our merger with Ryland, we were able to deliver 7,237 homes during 2015, generating home sale revenues of $3,449.0 million, up 46% from the prior year, on an average selling price of $477 thousand, compared to $478 thousand for 2014.  We reported net income of $213.5 million, or $2.26 per diluted share, as compared to $215.9 million, or $2.68 per diluted share, for 2014.  Our 2015 results include approximately $62 million of merger and other one-time costs and an approximate $64 million reduction in gross margin from home sales due to the application of purchase accounting in connection with the merger.  Homebuilding pretax income for 2015 was $325.6 million, compared to $340.1 million in 2014 and $246.3 million in 2013.  Our gross margin from home sales was 22.4% for 2015, compared to 26.1% for 2014, and our operating margin from home sales for 2015 was 11.3%, compared to 14.4% for 2014.
 
We ended 2015 with $187.1 million of homebuilding cash (including $36.0 million of restricted cash), compared to $218.7 million (including $38.2 million of restricted cash) at the end of the prior year.  Net cash used in operating activities during 2015 was $271.4 million compared to $362.4 million in 2014.  The decrease in cash used in operating activities for 2015 as compared to the prior year was driven primarily by a 45% increase in homebuilding revenues, partially offset by a $100.5 million increase in cash land purchase and development costs.  As of December 31, 2015, we had $631.1 million in remaining availability under our $750 million revolving credit facility.

Homebuilding
 
         
Year Ended December 31,
         
2015
 
% Change
 
2014
 
% Change
 
2013
          (Dollars in thousands) 
Homebuilding revenues:
                         
 
North
 
$
 262,988
 
 n/a
 
$
 n/a
 
 n/a
 
$
 n/a
 
Southeast
 
 988,773
 
47%
   
 672,776
 
36%
   
 496,070
 
Southwest
 
 889,496
 
80%
   
 495,008
 
46%
   
 339,852
 
West
 
 
 1,355,154
 
9%
 
 
 1,243,394
 
15%
 
 
 1,078,687
   
Total homebuilding revenues
 
$
 3,496,411
 
45%
 
$
 2,411,178
 
26%
 
$
 1,914,609
                               
Homebuilding pretax income:
                         
 
North
 
$
 5,556
 
 n/a
 
$
 n/a
 
 n/a
 
$
 n/a
 
Southeast
 
 69,726
 
5%
   
 66,232
 
71%
   
 38,672
 
Southwest
 
 70,851
 
45%
   
 48,958
 
48%
   
 33,119
 
West
 
 
 179,417
 
(20%)
 
 
 224,931
 
29%
 
 
 174,478
   
Total homebuilding pretax income
 
$
 325,550
 
(4%)
 
$
 340,121
 
38%
 
$
 246,269
                               
Homebuilding pretax income as a percentage of homebuilding revenues:
                         
 
North
 
2.1%
 
 n/a
   
 n/a
 
 n/a
   
 n/a
 
Southeast
 
7.1%
 
(2.7%)
   
9.8%
 
2.0%
   
7.8%
 
Southwest
 
8.0%
 
(1.9%)
   
9.9%
 
0.2%
   
9.7%
 
West
   
13.2%
 
(4.9%)
 
 
18.1%
 
1.9%
 
 
16.2%
   
Total homebuilding pretax income percentage
 
 
9.3%
 
(4.8%)
 
 
14.1%
 
1.2%
 
 
12.9%
 
         
As of December 31,
         
2015
 
% Change
 
2014
 
% Change
 
2013
           (Dollars in thousands)
Total Assets:
                         
 
North
 
$
 732,689
 
 n/a
 
$
 n/a
 
 n/a
 
$
 n/a
 
Southeast
   
 1,766,241
 
66.6%
   
 1,060,343
 
34.9%
   
 785,988
 
Southwest
   
 1,470,654
 
135.4%
   
 624,765
 
26.4%
   
 494,342
 
West
   
 2,357,597
 
35.2%
   
 1,744,308
 
16.9%
   
 1,491,974
 
Corporate (1)
 
 
 1,594,175
 
222.1%
 
 
 494,920
 
(30.9%)
 
 
 716,397
   
Total homebuilding
   
 7,921,356
 
101.9%
   
 3,924,336
 
12.5%
   
 3,488,701
 
Financial services
   
 424,149
 
86.6%
   
 227,303
 
52.7%
   
 148,851
     
Total Assets
 
$
 8,345,505
 
101.0%
 
$
 4,151,639
 
14.1%
 
$
 3,637,552
________________
(1)
The assets in our Corporate Segment include cash and cash equivalents and our deferred tax asset and, for 2015, goodwill recorded in connection with the merger with Ryland.  As of the end of the period covered by this annual report on Form 10-K, we have not yet finalized the allocation of goodwill to our reporting units.

For 2015, we generated homebuilding pretax income of $325.6 million compared to $340.1 million in 2014.  This decrease was primarily the result of approximately $62 million in merger and other one-time costs, which was partially offset by a 46% increase in home sale revenues.

For 2014, we generated homebuilding pretax income of $340.1 million compared to $246.3 million in 2013.  This improvement was primarily the result of a 25% increase in home sale revenues, an increase in gross margin from home sales and the operating leverage inherent in our business.

Revenues

Homebuilding revenues for 2015 increased 45% from 2014 primarily as a result of a 46% increase in new home deliveries.  Homebuilding revenues for 2014 increased 26% from 2013 as a result of an 8% increase in new home deliveries, a 16% increase in our consolidated average home price to $478 thousand and a $28.8 million increase in land sale revenues.
 
           
Year Ended December 31,
           
2015
 
% Change
 
2014
 
% Change
 
2013
New homes delivered:
                   
 
North
 
 787
 
 n/a
 
 n/a
 
 n/a
 
 n/a
 
Southeast
 
 2,471
 
32%
 
 1,871
 
7%
 
 1,745
 
Southwest
 
 1,891
 
79%
 
 1,059
 
27%
 
 837
 
West
 
 2,088
 
3%
 
 2,026
 
0%
 
 2,020
     
Total
 
 7,237
 
46%
 
 4,956
 
8%
 
 4,602

New home deliveries increased 46% in 2015 as compared to the prior year, resulting primarily from the backlog and new selling communities we acquired in connection with our merger with Ryland.  New home deliveries increased 8% in 2014 as compared to 2013, primarily as a result of a 21% increase in the number of homes in backlog at the beginning of the year as compared to the year earlier period and a 10% increase in average active selling communities throughout 2014 compared to 2013.  These increases were driven largely by a 21% increase in deliveries from the Company's Southwest region as a result of a 41% increase in the number of homes in backlog at the beginning of the year as compared to the year earlier period, and where average active selling communities grew 27%.
 
         
Year Ended December 31,
         
2015
 
% Change
 
2014
 
% Change
 
2013
          (Dollars in thousands) 
Average selling prices of homes delivered:
                         
 
North
 
$
 334
 
 n/a
 
$
 n/a
 
 n/a
 
$
 n/a
 
Southeast
   
 395
 
12%
   
 354
 
25%
   
 283
 
Southwest
   
 462
 
(1%)
   
 465
 
15%
   
 404
 
West
 
 
 640
 
7%
 
 
 598
 
13%
 
 
 528
     
Total
 
$
 477
 
(0%)
 
$
 478
 
16%
 
$
 413
 
During 2015, our consolidated average home price of $477 thousand was essentially flat when compared to $478 thousand for 2014, resulting primarily from the lower average home price of the homes in backlog we acquired in connection with the merger.  During 2014, our consolidated average home price increased 16% to $478 thousand as compared to $413 thousand for 2013.  This increase was largely due to higher average home prices within the majority of our markets, a shift to more move-up product and a decrease in the use of sales incentives.

Gross Margin

Our 2015 gross margin percentage from home sales was 22.4%, down 370 basis points from 26.1% in 2014.  Our 2015 gross margins were significantly and adversely impacted by the fair value accounting applied to homes under construction acquired in connection with the merger, with fair value accounting causing us to recognize approximately $64 million as an increase to cost of sales during the 2015 fourth quarter.  Our 2015 gross margins were also negatively impacted by an increase in direct construction costs per home.  Our 2014 gross margin percentage from home sales was 26.1%, up 150 basis points from 24.6% in 2013.  This 150 basis point increase resulted primarily from price increases and a higher proportion of deliveries from more profitable communities, partially offset by an increase in direct construction costs per home.

SG&A Expenses

Our 2015 SG&A expenses (including corporate G&A) were $390.7 million compared to $275.9 million for the prior year.  Despite this increase in dollar amount, our 2015 SG&A rate from home sales was 11.3% versus 11.7% for 2014.  This 40 basis point improvement was primarily the result of a 46% increase in home sale revenues and the operating leverage we gained in connection with the merger.  We continue to leverage our G&A expenses as our home sale revenues have increased year over year, with G&A expenses as a percentage of home sale revenues improving to 6.3% for 2015 compared to 6.8% for 2014.  Our selling expenses as a percentage of home sale revenues increased slightly at 5.0% for 2015 compared to 4.9% for 2014.
 
Our 2014 SG&A expenses (including corporate G&A) were $275.9 million compared to $230.7 million for the prior year.  Despite this increase in dollar amount, our 2014 SG&A rate from home sales was 11.7% versus 12.1% for 2013.  This 40 basis point improvement was primarily the result of a 25% increase in home sale revenues and our operating leverage.  Our G&A expenses as a percentage of home sale revenues were 6.8% for 2014 compared to 7.2% for 2013, and our selling expenses as a percentage of home sale revenues were 4.9% for both 2014 and 2013.

Interest Expense

During the years ended December 31, 2015, 2014 and 2013, our qualified assets exceeded our debt.  As of December 31, 2015, 2014 and 2013, the amount of our qualified assets in excess of our debt was $1.6 billion, $827.7 million and $430.6 million, respectively.  As a result, all of our interest incurred during 2015, 2014 and 2013 was capitalized in accordance with ASC Topic 835, Interest .

Other Income (Expense)

Other expense for 2015 was primarily attributable to $61.7 million in transaction and other one-time costs incurred in connection with the merger, including $9.7 million in project abandonment costs.  Other expense of $1.7 million for 2014 was primarily attributable to $2.2 million of project abandonment costs and $0.3 million of acquisition-related costs, partially offset by $0.6 million of interest income.

Operating Data
 
         
Year Ended December 31,
         
2015
 
% Change
 
% Absorption Change (1)
 
2014
 
% Change
 
% Absorption Change (1)
 
2013
Net new orders (2):
                           
 
North
 
 556
 
 n/a
 
 n/a
 
 n/a
 
 n/a
 
 n/a
 
 n/a
 
Southeast
 
 2,342
 
27%
 
(15%)
 
 1,841
 
(5%)
 
(9%)
 
 1,938
 
Southwest
 
 1,838
 
52%
 
(12%)
 
 1,207
 
26%
 
(2%)
 
 956
 
West
 
 2,427
 
26%
 
3%
 
 1,919
 
(4%)
 
(8%)
 
 2,004
     
Total
 
 7,163
 
44%
 
(12%)
 
 4,967
 
1%
 
(8%)
 
 4,898
________________
(1)
Represents the percentage change of net new orders per average number of selling communities during the period.
(2)
Net new orders are new orders for the purchase of homes during the period, less cancellations during such period of existing contracts for the purchase of homes.
 
 
 
 
 
 
Year Ended December 31,
 
 
 
 
 
2015
 
% Change
 
2014
 
% Change
 
2013
 
 
 
 
 
(Dollars in thousands)
Average selling prices of net new orders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North
 
$
 348
 
 n/a
 
$
 n/a
 
 n/a
 
$
 n/a
 
Southeast
 
 
 422
 
13%
 
 
 374
 
17%
 
 
 320
 
Southwest
 
 
 481
 
2%
 
 
 473
 
13%
 
 
 420
 
West
 
 
 653
 
9%
 
 
 600
 
9%
 
 
 551
 
 
 
Total
 
$
 510
 
5%
 
$
 485
 
12%
 
$
 434
 
         
Year Ended December 31,
         
2015
 
% Change
 
2014
 
% Change
 
2013
Average number of selling communities during the year:
                   
 
North
 
 30
 
 n/a
 
 n/a
 
 n/a
 
 n/a
 
Southeast
 
 111
 
50%
 
 74
 
4%
 
 71
 
Southwest
 
 87
 
74%
 
 50
 
28%
 
 39
 
West
 
 71
 
22%
 
 58
 
4%
 
 56
     
Total
 
 299
 
64%
 
 182
 
10%
 
 166
 
Net new orders for 2015 increased 44% from the prior year on a 64% increase in the number of average active selling communities.  Our monthly sales absorption rate was 2.0 per community for 2015, down from 2.3 for 2014, and was 1.6 per community for the 2015 fourth quarter compared to 1.8 for the 2014 fourth quarter.  The decrease in our sales absorption reflects our continued emphasis on margin over sales pace, as well as the challenges involved in integrating approximately 350 communities acquired from Ryland in connection with the merger.  Our consolidated cancellation rate for 2015 was 18% compared to 17% for 2014, and was 22% for the 2015 fourth quarter compared to 21% for the 2014 fourth quarter.  Our 2015 fourth quarter cancellation rate was consistent with our average historical cancellation rate over the last 10 years.  At December 31, 2015, we had 575 active selling communities.
 
Net new orders for 2014 increased 1% from the prior year on a 10% increase in the number of average active selling communities.  Our monthly sales absorption rate was 2.3 per community for 2014, down from 2.5 for 2013, and was 1.8 per community for the 2014 fourth quarter compared to 1.7 for the 2013 fourth quarter.  Our consolidated cancellation rate for 2014 was 17% compared to 15% for 2013, and was 21% for both the 2014 fourth quarter and 2013 fourth quarter.
 
         
As of December 31,
         
2015
 
2014
 
% Change
 
 
Homes
 
Dollar
Value
 
Homes
 
Dollar
Value
 
Homes
 
Dollar
Value
Backlog ($ in thousands):                            
 
North
 
 1,003
 
$
 348,285
 
 n/a
 
$
 n/a
 
 n/a
 
 n/a
 
Southeast
 
 1,621
   
 702,388
 
 771
   
 365,355
 
110%
 
92%
 
Southwest
 
 1,902
   
 845,499
 
 546
   
 289,627
 
248%
 
192%
 
West
 
 1,085
 
 
 675,920
 
 394
 
 
 261,394
 
175%
 
159%
     
Total
 
 5,611
 
$
 2,572,092
 
 1,711
 
$
 916,376
 
228%
 
181%

The dollar value of our backlog as of December 31, 2015 increased 181% from 2014 to $2.6 billion.  The increase in backlog value from 2014 was driven primarily by the 228% increase in units in backlog as a result of the merger, partially offset by a 14% decrease in our consolidated average home price in backlog to $458 thousand.  The lower average home price in our backlog as of December 31, 2015 compared to the prior year was primarily attributable to a shift in product mix.
 
         
At December 31,
         
2015
 
% Change
 
2014
 
% Change
 
2013
Homesites owned and controlled:
                   
 
North
 
 15,222
 
 n/a
 
 n/a
 
 n/a
 
 n/a
 
Southeast
 
 24,393
 
48%
 
 16,458
 
2%
 
 16,148
 
Southwest
 
 16,151
 
133%
 
 6,944
 
(1%)
 
 7,038
 
West
 
 14,728
 
22%
 
 12,028
 
0%
 
 11,989
     
Total (including joint ventures)
 
 70,494
 
99%
 
 35,430
 
1%
 
 35,175
                           
 
Homesites owned
 
 52,583
 
81%
 
 28,972
 
4%
 
 27,733
 
Homesites optioned or subject to contract
 
 15,972
 
155%
 
 6,260
 
(11%)
 
 7,047
 
Joint venture homesites (1)
 
 1,939
 
879%
 
 198
 
(50%)
 
 395
     
Total (including joint ventures) (1)
 
 70,494
 
99%
 
 35,430
 
1%
 
 35,175
                           
Homesites owned:
                   
 
Raw lots
 
 8,814
 
8%
 
 8,162
 
31%
 
 6,211
 
Homesites under development
 
 23,395
 
188%
 
 8,119
 
(13%)
 
 9,340
 
Finished homesites
 
 9,488
 
32%
 
 7,210
 
3%
 
 7,024
 
Under construction or completed homes
 
 9,092
 
193%
 
 3,104
 
11%
 
 2,804
 
Held for sale
 
 1,794
 
(25%)
 
 2,377
 
1%
 
 2,354
   
Total
 
 52,583
 
81%
 
 28,972
 
4%
 
 27,733
________________
(1)
Joint venture homesites represent our expected share of land development joint venture homesites and all of the homesites of our homebuilding joint ventures.

Total homesites owned and controlled as of December 31, 2015 increased 99% from 2014.  We purchased $515.3 million of land (6,631 homesites) during 2015 and acquired an additional 40,245 homesites as a result of the merger.  The homesites we purchased during 2015, other than through the merger, were located as follows 12% (based on homesites) in the North, 39% in the Southeast,18% in the Southwest and 31% in the West .  During 2014, we purchased $585.7 million of land (6,813 homesites), of which 47% (based on homesites) was located in the Southeast, 21% in the Southwest, and 32% in the West.  As of December 31, 2015, we owned or controlled 70,494 homesites, of which 47,061 are owned and actively selling or under development, 17,911 are controlled or under option, and the remaining 5,522 homesites are held for future development or for sale.
 
           
At December 31,
           
2015
 
% Change
 
2014
 
% Change
 
2013
Homes under construction and speculative homes:
                   
 
Homes under construction (excluding specs)
 
 4,304
 
281%
 
 1,131
 
0%
 
 1,130
 
Speculative homes under construction
 
 1,777
 
97%
 
 901
 
3%
 
 871
   
Total homes under construction
 
 6,081
 
199%
 
 2,032
 
2%
 
 2,001
                             
Completed homes:
                   
 
Completed and unsold homes (excluding models)
 
 1,325
 
157%
 
 515
 
57%
 
 327
 
Completed and under contract (excluding models)
 
 754
 
266%
 
 206
 
21%
 
 170
 
Model homes
 
 929
 
165%
 
 351
 
15%
 
 306
   
Total completed homes
 
 3,008
 
181%
 
 1,072
 
33%
 
 803
 
Total homes under construction (excluding speculative homes) as of December 31, 2015 were up 199% compared to December 31, 2014, consistent with our homes in backlog which were up 228% compared to December 31, 2014.  Speculative homes under construction and completed and unsold homes (excluding models) as of December 31, 2015 increased 119% over the prior year period, resulting primarily from a year-over-year increase in our number of active selling communities as a result of the merger and our strategy to maintain a supply of speculative homes in each community.
 
Financial Services
 
For 2015, our financial services segment generated pretax income of $16.9 million compared to $9.8 million in 2014.  The increase in 2015 was driven by a 51% increase in the dollar volume of loans originated and sold and a $5.6 million increase in title service revenues.  These changes were partially offset by lower margins on loans closed and sold.

For 2014, our financial services segment generated pretax income of $9.8 million compared to $11.4 million in 2013.  The decrease in 2014 was driven by lower margins on loans closed and sold and a $0.5 million increase in loan loss expense related to indemnification and repurchase allowances.  These changes were partially offset by a $0.3 million decrease in loan loss expense (net of recoveries) related to allowances for loans held for investment in 2014 compared to the prior year.

The following table details information regarding loan originations and related credit statistics for our mortgage financing operations:

         
Year Ended December 31,
         
2015
 
2014
 
2013
          (Dollars in thousands)
Total Originations:
           
 
Loans
 
 4,356
 
 2,936
 
 2,982
 
Principal
 
 $1,478,196
 
 $986,335
 
 $933,649
 
Capture rate
 
71%
 
77%
 
81%
                   
Loans Sold to Third Parties:
           
 
Loans
 
 4,259
 
 2,806
 
 2,994
 
Principal
 
 $1,423,576
 
 $931,786
 
 $925,449
                   
Mortgage Loan Origination Product Mix:
           
 
FHA loans
 
13%
 
8%
 
18%
 
Other government loans (VA & USDA)
 
10%
 
10%
 
14%
   
Total government loans
 
23%
 
18%
 
32%
 
Conforming loans
 
69%
 
74%
 
65%
 
Jumbo loans
 
8%
 
8%
 
3%
         
100%
 
100%
 
100%
                   
Loan Type:
           
 
Fixed
 
93%
 
92%
 
96%
 
ARM
 
7%
 
8%
 
4%
                   
Credit Quality:
           
 
Avg. FICO score
 
746
 
752
 
744
                   
Other Data:
           
 
Avg. combined LTV ratio
 
82%
 
80%
 
84%
 
Full documentation loans
 
100%
 
100%
 
100%
 
Non-Full documentation loans
 
 
 
 
Income Taxes

Our 2015 provision for income taxes was $129.0 million primarily related to our $342.5 million of pretax income.  As of December 31, 2015, we had a $397.4 million deferred tax asset which was offset by a valuation allowance of $1.2 million related to state net operating loss carryforwards that are limited by shorter carryforward periods.  As of such date, $112.6 million of our deferred tax asset related to net operating loss carryforwards that are subject to the Internal Revenue Code Section 382 gross annual limitation of $15.6 million for both federal and state purposes.  The $284.8 million balance of the deferred tax asset is not subject to such limitations.
 
Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable in accordance with ASC Topic 740, Income Taxes ("ASC 740").  ASC 740 requires an assessment of available positive and negative evidence and, if the available positive evidence outweighs the available negative evidence, such that we are able to conclude that it is more likely than not (likelihood of more than 50%) that our deferred tax asset will be realized, we are required to reverse any corresponding deferred tax asset valuation allowance.  We continue to evaluate our deferred tax asset on a quarterly basis and note that, if economic conditions were to change such that we earn less taxable income than the amount required to fully utilize our deferred tax asset, a portion of the asset may expire unused.  See Note 13 to our accompanying consolidated financial statements for further discussion.

Liquidity and Capital Resources

Our principal uses of cash over the last several years have been for:

·    land acquisition
·    homebuilder acquisitions
 
·    principal and interest payments on debt
·    cash collateralization

·    construction and development
·    operating expenses
·    stock repurchases
·    the payment of dividends
 
Cash requirements over the last several years have been met by:

·    internally generated funds
·    bank revolving credit and term loans
·    land option contracts and seller notes
·    public and private sales of our equity
·    public and private note offerings
·    joint venture financings
·    assessment district bond financings
·    letters of credit and surety bonds
·    mortgage credit facilities
·    tax refunds

For the year ended December 31, 2015, we used $271.4 million of cash in operating activities versus $362.4 million in the year earlier period.  The decrease in cash used in operating activities for 2015 as compared to the prior year was driven primarily by a 45% increase in homebuilding revenues, partially offset by a $100.5 million increase in cash land purchase and development costs .  Cash flows provided by investing activities for 2015 included $268.5 million of cash acquired from Ryland with the merger.  As of December 31, 2015, our homebuilding cash balance was $187.1 million (including $36.0 million of restricted cash).
 
Revolving Credit Facility. In October 2015, the Company entered into a new credit agreement that provides for total lending commitments of $750 million, $350 million of which is available for letters of credit.  It also has an accordion feature under which the Company may increase the total commitment up to a maximum aggregate amount of $1.2 billion, subject to certain conditions, including the availability of additional bank commitments.  Interest rates, as defined in the credit agreement, approximate LIBOR (approximately 0.43% at December 31, 2015) plus 1.75% or Prime (3.50% at December 31, 2015) plus 0.75%.  The facility matures on October 5, 2019.
 
In addition to customary representations and warranties, the facility contains financial and other covenants, including a minimum tangible net worth requirement of $1.65 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), a net homebuilding leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 2.00 to 1.00 and a land covenant which limits land not under development to an amount not to exceed tangible net worth. The Company is also required to maintain either (a) a minimum liquidity level (unrestricted cash in excess of interest incurred for the previous four quarters) or (b) a minimum interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.25 to 1.00.  The new facility also limits, among other things, the Company's investments in joint ventures and the amount of the Company's common stock that the Company can repurchase.  On December 31, 2015, no borrowings were outstanding and the Company had outstanding letters of credit issued under the new facility totaling $118.9 million, leaving $631.1 million available under the new facility to be drawn.
 
Our covenant compliance for the Revolving Facility is set forth in the table below:
 
Covenant and Other Requirements
 
Actual at
December 31, 2015
 
Covenant
Requirements at
December 31, 2015
      (Dollars in millions)
           
Consolidated Tangible Net Worth (1)
  $2,923.3            ≥   $1,689.5
Leverage Ratio:          
 
Net Homebuilding Debt to Adjusted Consolidated Tangible Net Worth Ratio (2)
 
1.14
 
       ≤   2 .00
Liquidity or Interest Coverage Ratio (3):          
  Liquidity   $119.2            ≥   $172.3
  EBITDA (as defined in the Revolving Facility) to Consolidated Interest Incurred (4)   2.54            ≥   1.25
Investments in Homebuilding Joint Ventures or Consolidated Homebuilding Non-Guarantor Entities (5)   $646.5            ≤   $1,103.1
Actual/Permitted Borrowings under the Revolving Facility (6)   $118.9            ≤   $750.0
________________  
(1)
The minimum covenant requirement amount is subject to increase over time based on subsequent earnings (without deductions for losses) and proceeds from equity offerings.
(2)
Net Homebuilding Debt represents Consolidated Homebuilding Debt reduced for certain cash balances in excess of $5 million.
(3)
Under the liquidity and interest coverage ratio covenant, we are required to either (i) maintain an unrestricted cash balance in excess of our consolidated interest incurred for the previous four fiscal quarters or (ii) satisfy a minimum interest coverage ratio.
(4)
Consolidated Interest Incurred excludes noncash interest expense.
(5)
Net investments in unconsolidated homebuilding joint ventures or consolidated homebuilding non-guarantor entities must not exceed 35% of consolidated tangible net worth plus $80 million.
(6)
Actual amount reflects outstanding letters of credit issued under the facility.  As of December 31, 2015 our availability under the Revolving Facility was $631.1 million.

Letter of Credit Facilities.  As of December 31, 2015, in addition to our $350 million letter of credit sublimit under our revolving credit facility, we were party to four committed letter of credit facilities totaling $48 million, of which $33.8 million was outstanding.  These facilities require cash collateralization and have maturity dates ranging from October 2016 to October 2017.  As of December 31, 2015, these facilities were secured by cash collateral deposits of $34.5 million.  Upon maturity, we may renew or enter into new letter of credit facilities with the same or other financial institutions.

Senior and Convertible Senior Notes.  As of December 31, 2015, the principal amount outstanding on our senior and convertible senior notes payable consisted of the following:
 
   
December 31, 2015
   
(Dollars in thousands)
10.75% Senior Notes due September 2016
 
$
 280,000
8.4 % Senior Notes due May 2017
 
 230,000
8.375% Senior Notes due May 2018
 
 575,000
1.625% Convertible Senior Notes due May 2018
 
 225,000
0.25% Convertible Senior Notes due June 2019
 267,500
6.625% Senior Notes due May 2020
 
 300,000
8.375% Senior Notes due January 2021
 
 400,000
6.25% Senior Notes due December 2021
 
 300,000
5.375% Senior Notes due October 2022
 
 250,000
5.875% Senior Notes due November 2024
 
 300,000
1.25% Convertible Senior Notes due August 2032
 
 253,000
   
$
 3,380,500

As required by the applicable note indentures, certain Company subsidiaries guarantee the Company's obligations under the notes.  The guarantees are unsecured obligations of each subsidiary, ranking equal in right of payment with all such subsidiary's existing and future unsecured and unsubordinated indebtedness.  Interest on each series of notes is payable semi-annually.  Each of the senior notes rank equally with all of the Company's other unsecured and unsubordinated indebtedness.
 
The Company's notes contain various restrictive covenants.  Our 10.75% Senior Notes due 2016 contain our most restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments.  Outside of the specified categories of indebtedness that are carved out of the additional indebtedness limitation (including a carve-out for up to $1.1 billion in credit facility indebtedness), the Company must satisfy at least one of two conditions (either a maximum leverage condition or a minimum interest coverage condition) to incur additional indebtedness.  The Company must also satisfy at least one of these two conditions to make restricted payments.  Restricted payments include dividends, stock repurchases and investments in and advances to our joint ventures and other unrestricted subsidiaries.  Our ability to make restricted payments is also subject to a basket limitation. 
 
As of December 31, 2015, as illustrated in the table below, we were able to incur additional indebtedness and make restricted payments because we satisfied both conditions.
 
Covenant Requirements
 
Actual at
December 31, 2015
 
Covenant
Requirements at
December 31, 2015
             
Total Leverage Ratio:
         
 
Indebtedness to Consolidated Tangible Net Worth Ratio
 
1.27
 
≤     2.25
Interest Coverage Ratio:
         
 
EBITDA (as defined in the indenture) to Consolidated Interest Incurred
 
2.85
 
≥    2.00
 
The Company's 1.625% Convertible Senior Notes due 2018 (the "1.625% Convertible Notes") are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis.  The 1.625% Convertible Notes bear interest at a rate of 1.625% per year and will mature on May 15, 2018, unless earlier converted or repurchased.  The holders may convert their 1.625% Convertible Notes at any time into shares of the Company's common stock at a conversion rate of 31.8207 shares of common stock per $1,000 of their principal amount (which is equal to a conversion price of approximately $31.43 per share), subject to adjustment.  The Company may not redeem the 1.625% Convertible Notes prior to the stated maturity date.
 
The Company's 0.25% Convertible Senior Notes due 2019 (the "0.25% Convertible Notes") are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis.  The 0.25% Convertible Notes bear interest at a rate of 0.25% per year and will mature on June 1, 2019, unless earlier converted, redeemed or repurchased.  The holders may convert their 0.25% Convertible Notes at any time into shares of the Company's common stock at a conversion rate of 13.5886 shares of common stock per $1,000 of their principal amount (which is equal
 
to a conversion price of approximately $73.59 per share), subject to adjustment.  The Company may not redeem the 0.25% Convertible Notes prior to June 6, 2017.  On or after that date, the Company may redeem for cash any or all of the 0.25% Convertible Notes, at its option, if the closing sale price of its common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending within 5 trading days immediately preceding the date on which it provides notice of redemption, including the last trading day of such 30 day trading period, exceeds 130 percent of the applicable conversion price on each applicable trading day.  The redemption price will equal 100 percent of the principal amount of the 0.25% Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
 
The Company's 1.25% Convertible Senior Notes due 2032 (the "1.25% Convertible Notes") are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis.  The 1.25% Convertible Notes bear interest at a rate of 1.25% per year and will mature on August 1, 2032, unless earlier converted, redeemed or repurchased.  The holders may convert their 1.25% Convertible Notes at any time into shares of the Company's common stock at a conversion rate of 24.7787 shares of common stock per $1,000 of their principal amount (which is equal to a conversion price of approximately $40.36 per share), subject to adjustment.  The Company may not redeem the 1.25% Convertible Notes prior to August 5, 2017.  On or after August 5, 2017 and prior to the maturity date, the Company may redeem for cash all or part of the 1.25% Convertible Notes at a redemption price equal to 100% of the principal amount of the 1.25% Convertible Notes being redeemed.  On each of August 1, 2017, August 1, 2022 and August 1, 2027, holders of the 1.25% Convertible Notes may require the Company to purchase all or any portion of their 1.25% Convertible Notes for cash at a price equal to 100% of the principal amount of the 1.25% Convertible Notes to be repurchased.
 
We repaid the remaining $29.8 million principal balance of our 7% Senior Notes upon maturity in August 2015.
 
Potential Future Transactions.   In the future, we may, from time to time, undertake negotiated or open market purchases of, or tender offers for, our notes prior to maturity when they can be purchased at prices that we believe are attractive.  We may also, from time to time, engage in exchange transactions (including debt for equity and debt for debt transactions) for all or part of our notes.  Such transactions, if any, will depend on market conditions, our liquidity requirements, contractual restrictions and other factors. 
 
Joint Venture Loans.  As described more particularly under the heading "Off-Balance Sheet Arrangements", our land development and homebuilding joint ventures have historically obtained secured acquisition, development and/or construction financing.  This financing is designed to reduce the use of funds from our corporate financing sources.  As of December 31, 2015, only two joint ventures had project specific debt outstanding, which totaled $33.7 million.  This joint venture bank debt was non-recourse to us.  At December 31, 2015, we had no joint venture surety bonds outstanding subject to indemnity arrangements by us.
 
Secured Project Debt and Other Notes Payable.   At December 31, 2015, we had $25.7 million outstanding in secured project debt and other notes payable.  Our secured project debt and other notes payable consist of seller non-recourse financing and community development district and similar assessment district bond financings used to finance land acquisition, development and infrastructure costs for which we are responsible.
 
Mortgage Credit Facilities.  At December 31, 2015, we had $303.4 million outstanding under our mortgage financing subsidiary's mortgage credit facilities.  These mortgage credit facilities consisted of a $200 million repurchase facility ($25 million committed and $175 million uncommitted), maturing in June 2016, and a $100 million repurchase facility, maturing in January 2016, both with the same lender.  These two facilities were replaced in January 2016 with a $200 million uncommitted repurchase facility with the same lender.  This new facility matures in January 2017.  In addition, our mortgage subsidiary has a $100 million repurchase facility, maturing in April 2016, with another lender.  These facilities require our mortgage financing subsidiary to maintain cash collateral accounts, which totaled $4.0 million as of December 31, 2015, and also contain financial covenants which require CalAtlantic Mortgage to, among other things, maintain a minimum level of tangible net worth, not to exceed a debt to tangible net worth ratio, maintain a minimum liquidity amount based on a measure of total assets (inclusive of the cash collateral requirement), and satisfy pretax income (loss) requirements.  As of December 31, 2015, CalAtlantic Mortgage was in compliance with the financial and other covenants contained in these facilities.
Surety Bonds.   Surety bonds serve as a source of liquidity for the Company because they are used in lieu of cash deposits and letters of credit that would otherwise be required by governmental entities and other third parties to ensure our  completion of the infrastructure of our projects and other performance obligations.  At December 31, 2015, we had approximately $804.3 million in surety bonds outstanding (exclusive of surety bonds related to our joint ventures) , with respect to which we had an estimated $465.1 million remaining in cost to complete.
Availability of Additional Liquidity.  Over the last several years we have focused on acquiring and developing strategically located and appropriately priced land and on designing and building highly desirable, amenity-rich communities and homes that appeal to the home buying segments we target.  In the near term, so long as we are able to continue to find appropriately priced land opportunities, we plan to continue with this strategy.  To that end, we may utilize cash generated from our operating activities, our $750 million revolving credit facility (including through the exercise of the accordion feature which would allow the facility be increased up to $1.2 billion, subject to the availability of additional capital commitments and certain other conditions) and the debt and equity capital markets to finance these activities.
It is important to note, however, that the availability of additional capital, whether from private capital sources (including banks) or the public capital markets, fluctuates as market conditions change.  There may be times when the private capital markets and the public debt or equity markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would not be able to access capital from these sources.  A weakening of our financial condition, including in particular, a material increase in our leverage or a decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing.
Dividends.  For the year ended December 31, 2015, we paid a dividend of $0.04 per share on December 30, 2015.  We did not pay dividends during the years ended December 31, 2014 and 2013.  On February 11, 2016 our Board of Directors declared a dividend of $0.04 per share to be paid on March 30, 2016 to holders of record on March 15, 2016.
Stock Repurchases.  We did not repurchase capital stock during the year ended December 31, 2013.  On October 28, 2014, we announced that our Board of Directors authorized a $100 million stock repurchase plan.  During 2014, we repurchased 1.0 million shares (restated to reflect the one-for-five reverse stock split) of our common stock in open market transactions under the plan.  During 2015, we repurchased 645 thousand shares (restated to reflect the one-for-five reverse stock split) of our common stock in open market transactions under the plan, and as of December 31, 2015, we had remaining authorization to repurchase $41.3 million of our common stock.  On February 11, 2016 we announced a new $200 million share repurchase plan that replaces in its entirety the remaining authorization available on the October 28, 2014 plan.
Leverage.  Our homebuilding debt to total book capitalization as of December 31, 2015 was 47.5% and our adjusted net homebuilding debt to adjusted total book capitalization was 46.1%.  In addition, our homebuilding debt to adjusted homebuilding EBITDA as of December 31, 2015 and 2014 was 5.4x and 4.2x, respectively, and our adjusted net homebuilding debt to adjusted homebuilding EBITDA was 5.1x and 3.8x, respectively (please see page 21 for the reconciliation of net income, calculated and presented in accordance with GAAP, to adjusted homebuilding EBITDA).  We believe that these adjusted ratios are useful to investors as additional measures of our ability to service debt.
 
Contractual Obligations
 
The following table summarizes our future estimated cash payments under existing contractual obligations as of December 31, 2015, including estimated cash payments due by period.
 
   
Payments Due by Period
 
   
Total
   
Less Than 1 Year
   
1-3 Years
   
4-5 Years
   
After
5 Years
 
    (Dollars in thousands)  
Contractual Obligations
                   
Long-term debt principal payments (1)
 
$
3,406,183
   
$
302,856
   
$
1,032,307
   
$
568,020
   
$
1,503,000
 
Long-term debt interest payments
   
840,179
     
199,777
     
292,861
     
199,732
     
147,809
 
Operating leases (2)
   
29,464
     
8,926
     
13,893
     
6,060
     
585
 
Purchase obligations (3)
   
773,172
     
417,639
     
271,167
     
40,551
     
43,815
 
        Total
 
$
5,048,998
   
$
929,198
   
$
1,610,228
   
$
814,363
   
$
1,695,209
 
________________                          
(1)
Long-term debt represents senior and convertible senior notes payable and secured project debt and other notes payable. For a more detailed description of our long-term debt, please see Note 8 in our accompnaying consolidated financial statements.
(2)
For a more detailed description of our operating leases, please see Note 12.f. in our accompanying consolidated financial statements.
(3)
Purchase obligations represent commitments (net of deposits) for land purchase and option contracts with non-refundable deposits. For a more detailed description of our land purchase and option contracts, please see "Off-Balance Sheet Arrangements" below and Note 12.a. in our accompanying consolidated financial statements.

At December 31, 2015, we had mortgage two repurchase facilities with one lender totaling $300 million ($125 million committed and $175 million uncommitted) and a $100 million repurchase facility with another lender, and had $303.4 million outstanding under these facilities.
Off-Balance Sheet Arrangements
 
Land Purchase and Option Agreements
 
We are subject to customary obligations associated with entering into contracts for the purchase of land and improved homesites. These purchase contracts typically require us to provide a cash deposit or deliver a letter of credit in favor of the seller, and our purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development entitlements.  We also utilize option contracts with land sellers as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the near-term use of funds from our corporate financing sources.  Option contracts generally require us to provide a non-refundable deposit for the right to acquire lots over a specified period of time at predetermined prices.  We generally have the right at our discretion to terminate our obligations under both purchase contracts and option contracts by forfeiting our cash deposit or by repaying amounts drawn under our letter of credit with no further financial responsibility to the land seller, although in certain instances, the land seller has the right to compel us to purchase a specified number of lots at predetermined prices.
 
In some instances, we may also expend funds for due diligence, development and construction activities with respect to our land purchase and option contracts prior to purchase, which we would have to write off should we not purchase the land.  At December 31, 2015, we had non-refundable cash deposits outstanding of approximately $74.1 million and capitalized pre-acquisition and other development and construction costs of approximately $8.5 million relating to land purchase and option contracts having a total remaining purchase price of approximately $773.2 million.
 
Our utilization of option contracts is dependent on, among other things, the availability of land sellers willing to enter into option takedown arrangements, the availability of capital to financial intermediaries, general housing market conditions, and geographic preferences.  Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.
 
Land Development and Homebuilding Joint Ventures

Historically, we have entered into land development and homebuilding joint ventures from time to time as a means of:

·    accessing larger or highly desirable lot positions
·    establishing strategic alliances
·    leveraging our capital base
·    expanding our market opportunities
·    managing the financial and market risk associated with land holdings
 
These joint ventures have historically obtained secured acquisition, development and/or construction financing designed to reduce the use of funds from our corporate financing sources.  As of December 31, 2015, we held membership interests in 25 homebuilding and land development joint ventures, of which 13 were active and 12 were inactive or winding down.  As of such date, only two joint ventures had project specific debt outstanding, which totaled $33.7 million.  This joint venture debt is non-recourse to us, with $30.0 million scheduled to mature in June 2016 and $3.7 million scheduled to mature in May 2018.  At December 31, 2015, we had no joint venture surety bonds outstanding subject to indemnity arrangements by us.
  
Critical Accounting Policies

The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates and judgments, including those that impact our most critical accounting policies.  We base our estimates and judgments on historical experience and various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.  We believe that the accounting policies related to the following accounts or activities are those that are most critical to the portrayal of our financial condition and results of operations and require the more significant judgments and estimates:

Segment Reporting

We operate two principal businesses: homebuilding and financial services (consisting of our mortgage financing and title operations).  In accordance with ASC Topic 280, Segment Reporting ("ASC 280"), we have determined that each of our homebuilding operating divisions and our financial services operations are our operating segments.  Corporate is a non-operating segment.

Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached homes.  In accordance with the aggregation criteria defined in ASC 280, our homebuilding operating segments have been grouped into four reportable segments: North, consisting of our operating divisions in Georgia, Delaware, Illinois, Indiana, Maryland, Minnesota, New Jersey, Pennsylvania, Virginia and Washington D.C.; Southeast, consisting of our operating divisions in Florida and the Carolinas; Southwest, consisting of our operating divisions in Texas, Colorado and Nevada; and West, consisting of our operating divisions in California and Arizona.  In particular, we have determined that the homebuilding operating divisions within their respective reportable segments have similar economic characteristics, including similar historical and expected future long-term gross margin percentages.  In addition, the operating divisions also share all other relevant aggregation characteristics prescribed in ASC 280, such as similar product types, production processes and methods of distribution.  During the 2015 third quarter, in connection with transition planning related to our merger with Ryland, the chief operating decision maker began evaluating the business and allocating resources based on aggregating our Arizona operating segment within our California reportable segment.  Our Arizona operating segment was previously reported within our Southwest reportable segment, and as such, prior periods presented have been restated to conform to our new presentation.

Our mortgage financing operation provides mortgage financing to many of our homebuyers in substantially all of the markets in which we operate, and sells substantially all of the loans it originates in the secondary mortgage market.  Our title services operation provides title examinations for our homebuyers in substantially all of the markets in which we operate.  Our mortgage financing and title services operations are included in our financial services reportable segment, which is separately reported in our consolidated financial statements under "Financial Services."

Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating segments by centralizing key administrative functions such as accounting, finance and treasury, information technology, insurance and risk management, litigation, marketing and human resources.  Corporate also provides the necessary administrative functions to support us as a publicly traded company.  A substantial portion of the expenses incurred by Corporate are allocated to each of our operating divisions based on their respective percentage of revenues.

Inventories and Impairments

Inventories consist of land, land under development, homes under construction, completed homes and model homes and are stated at cost, net of any impairment losses.  We capitalize direct carrying costs, including interest, property taxes and related development costs to inventories.  Field construction supervision and related direct overhead are also included in the capitalized cost of inventories.  Direct construction costs are specifically identified and allocated to homes while other common costs, such as land, land improvements and carrying costs, are allocated to homes within a community based upon their anticipated relative sales or fair value.

We assess the recoverability of real estate inventories in accordance with the provisions of ASC Topic 360, Property, Plant, and Equipment ("ASC 360").  ASC 360 requires long-lived assets, including inventories, that are expected to be held and used in operations to be carried at the lower of cost or, if impaired, the fair value of the asset.  ASC 360 requires that companies evaluate long-lived assets for impairment based on undiscounted future cash flows of the assets at the lowest level for which there is identifiable cash flows.  Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

We evaluate real estate projects (including unconsolidated joint venture real estate projects) for inventory impairments when indicators of potential impairment are present.  Indicators of impairment include, but are not limited to: significant decreases in local housing market values and selling prices of comparable homes; significant decreases in gross margins and sales absorption rates; accumulation of costs in excess of budget; actual or projected operating or cash flow losses; and current expectations that a real estate asset will more likely than not be sold before its previously estimated useful life.

We perform a detailed budget and cash flow review of all of our real estate projects (including projects actively selling as well as projects under development and on hold) on a periodic basis throughout each fiscal year to, among other things, determine whether the estimated remaining undiscounted future cash flows of the project are more or less than the carrying
 
value of the asset.  If the undiscounted cash flows are more than the carrying value of the real estate project, then no impairment adjustment is required.  However, if the undiscounted cash flows are less than the carrying amount, then the asset is deemed impaired and is written-down to its fair value.  We evaluate the identifiable cash flows at the project level.  When estimating undiscounted future cash flows of a project, we are required to make various assumptions, including the following: (i) the expected sales prices and sales incentives to be offered, including the number of homes available and pricing and incentives being offered in other communities by us or by other builders; (ii) the expected sales pace and cancellation rates based on local housing market conditions and competition; (iii) costs expended to date and expected to be incurred in the future, including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction and overhead costs, and selling and marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property such as the possibility of a sale of lots to a third party versus the sale of individual homes.  Many of these assumptions are interdependent and changing one assumption generally requires a corresponding change to one or more of the other assumptions.  For example, increasing or decreasing the sales absorption rate has a direct impact on the estimated per unit sales price of a home, the level of time sensitive costs (such as indirect construction, overhead and carrying costs), and selling and marketing costs (such as model maintenance costs and promotional and advertising campaign costs).  Depending on what objective we are trying to accomplish with a community, it could have a significant impact on the project cash flow analysis.  For example, if our business objective is to drive delivery levels our project cash flow analysis will be different than if the business objective is to preserve operating margins.  These objectives may vary significantly from project to project, from division to division, and over time with respect to the same project.

Once we have determined a real estate project is impaired, we calculate the fair value of the project under a land residual value analysis and in certain cases in conjunction with a discounted cash flow analysis.  Under the land residual value analysis, we estimate what a willing buyer (including us) would pay and what a willing seller would sell a parcel of land for (other than in a forced liquidation) in order to generate a market rate operating margin based on projected revenues, costs to develop land, and costs to construct and sell homes within a community.  Under the discounted cash flow method, all estimated future cash inflows and outflows directly associated with the real estate project are discounted to calculate fair value.  The net present value of these project cash flows are then compared to the carrying value of the asset to determine the amount of the impairment that is required.  The land residual value analysis is the primary method that we use to calculate impairments as it is the principal method used by us and land sellers for determining the fair value of a residential parcel of land.  In many cases, we also supplement our land residual value analysis with a discounted cash flow analysis in evaluating the fair value.  In addition, for projects that require a longer time frame to develop and sell assets, in some instances we incorporate a certain level of inflation or deflation into our projected revenue and cost assumptions.  This evaluation and the assumptions used by management to determine future estimated cash flows and fair value require a substantial degree of judgment, especially with respect to real estate projects that have a substantial amount of development to be completed, have not started selling or are in the early stages of sales, or are longer-term in duration.  Due to the inherent uncertainty in the estimation process, significant volatility in the demand for new housing, and the availability of mortgage financing for potential homebuyers, actual results could differ significantly from our estimates.
 
From time to time, we write-off deposits related to land options that we decide not to exercise.  The decision not to exercise a land option takes into consideration changes in market conditions, the timing of required land takedowns, the willingness of land sellers to modify terms of the land option contract (including the price and timing of land takedowns), the availability and best use of our capital, and other factors.  The write-off is charged to homebuilding other income (expense) in our consolidated statement of operations in the period that we determine it is probable that the optioned property will not be acquired.  If we recover deposits which were previously written off, the recoveries are recorded to homebuilding other income (expense) in the period received.

Stock-Based Compensation
We account for share-based awards in accordance with ASC Topic 718, Compensation – Stock Compensation , which requires that compensation expense be measured and recognized at an amount equal to the fair value of share-based payments granted under compensation arrangements.  Our outstanding share-based awards include stock options, stock appreciation rights, restricted and unrestricted stock, and performance share awards.  The fair value of stock options and stock appreciation rights that vest based on time is calculated by using the Black-Scholes option-pricing model and the fair value of stock appreciation rights that vest based on market performance is calculated by using a lattice model.  The fair value of restricted stock, unrestricted stock and performance share awards is based on the market value of our common stock as of the grant date.  The determination of the fair value of share-based awards at the grant date requires judgment in developing assumptions and involves a number of variables.  These variables include, but are not limited to:  expected stock-price volatility over the term of the awards and expected stock option exercise behavior.  Additionally, judgment is required in estimating the number of share-based awards that are expected to be forfeited and, in the case of performance share awards,
the level of performance that will be achieved and the number of shares that will be earned.  If actual results differ significantly from these estimates, stock-based compensation expense and our consolidated results of operations could be significantly impacted.
Homebuilding Revenue and Cost of Sales

Homebuilding revenue and cost of sales are recognized after construction is completed, a sufficient down payment has been received, title has transferred to the homebuyer, collection of the purchase price is reasonably assured and we have no continuing involvement. Cost of sales is recorded based upon total estimated costs to be allocated to each home within a community. Any changes to the estimated costs are allocated to the remaining undelivered lots and homes within their respective community. The estimation and allocation of these costs requires a substantial degree of judgment by management.

The estimation process involved in determining relative sales or fair values is inherently uncertain because it involves estimating future sales values of homes before delivery. Additionally, in determining the allocation of costs to a particular land parcel or individual home, we rely on project budgets that are based on a variety of assumptions, including assumptions about construction schedules and future costs to be incurred. It is common that actual results differ from budgeted amounts for various reasons, including construction delays, increases in costs that have not been committed or unforeseen issues encountered during construction that fall outside the scope of existing contracts, or costs that come in less than originally anticipated. While the actual results for a particular construction project are accurately reported over time, a variance between the budget and actual costs could result in the understatement or overstatement of costs and have a related impact on gross margins between reporting periods. To reduce the potential for such variances, we have procedures that have been applied on a consistent basis, including assessing and revising project budgets on a periodic basis, obtaining commitments from subcontractors and vendors for future costs to be incurred, and utilizing the most recent information available to estimate costs. We believe that these policies and procedures provide for reasonably dependable estimates for purposes of calculating amounts to be relieved from inventories and expensed to cost of sales in connection with the sale of homes.

V ariable Interest Entities

We account for variable interest entities in accordance with ASC Topic 810, Consolidation ("ASC 810").  Under ASC 810, a variable interest entity ("VIE") is created when: (a) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders; (b) the entity's equity holders as a group either (i) lack the direct or indirect ability to make decisions about the entity, (ii) are not obligated to absorb expected losses of the entity or (iii) do not have the right to receive expected residual returns of the entity; or (c) the entity's equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of the equity holder with disproportionately few voting rights. If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (i) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and (ii) the obligation to absorb the expected losses of the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary beneficiary and must consolidate the VIE.  In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE.
 
Unconsolidated Homebuilding and Land Development Joint Ventures

Investments in our unconsolidated homebuilding and land development joint ventures are accounted for under the equity method of accounting.  Under the equity method, we recognize our proportionate share of earnings and losses earned by the joint venture upon the delivery of lots or homes to third parties.  All joint venture profits generated from land sales to us are deferred and recorded as a reduction to our cost basis in the lots we purchase until we ultimately sell the homes to be constructed to third parties.  Our share of joint venture losses from land sales to us are recorded in the period we acquire the property from the joint venture.  Our ownership interests in our unconsolidated joint ventures vary but are generally less than or equal to 50%.
 
We review inventory projects within our unconsolidated joint ventures for impairments consistent with the critical accounting policy described above under "Inventories and Impairments."  We also review our investments in unconsolidated joint ventures for evidence of an other than temporary decline in value.  To the extent that we deem any portion of our investment in unconsolidated joint ventures not recoverable, we impair our investment accordingly.
 
In addition, we accrue for guarantees provided to unconsolidated joint ventures when it is determined that there is an obligation that is due from us.  These obligations consist of various items, including but not limited to, surety indemnities,
 
credit enhancements provided in connection with joint venture borrowings such as loan-to-value maintenance agreements, construction completion agreements, and environmental indemnities.  In many cases we share these obligations with our joint venture partners, and in some cases, we are solely responsible for such obligations.  For further discussion regarding these guarantees, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements".

Warranty Accruals

In the normal course of business, we incur warranty-related costs associated with homes that have been delivered to homebuyers.  Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding revenues are recognized while indirect warranty overhead salaries and related costs are charged to cost of sales in the period incurred.  Amounts accrued are based upon historical experience rates.  We review the adequacy of the warranty accruals each reporting period by evaluating the historical warranty experience in each market in which we operate, and the warranty accruals are adjusted as appropriate for current quantitative and qualitative factors.  Factors that affect the warranty accruals include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim.  Although we consider the warranty accruals reflected in our consolidated balance sheet to be adequate, actual future costs could differ significantly from our currently estimated amounts.

Insurance and Litigation Accruals

Insurance and litigation accruals are established with respect to estimated future claims cost.  We maintain general liability insurance designed to protect us against a portion of our risk of loss from construction-related claims.  We also generally require our subcontractors and design professionals to indemnify us for liabilities arising from their work, subject to various limitations.  However, such indemnity is significantly limited with respect to certain subcontractors that are added to our general liability insurance policy.  We record allowances to cover our estimated costs of self-insured retentions and deductible amounts under these policies and estimated costs for claims that may not be covered by applicable insurance or indemnities.  Estimation of these accruals include consideration of our claims history, including current claims, estimates of claims incurred but not yet reported, and potential for recovery of costs from insurance and other sources.  We utilize the services of an independent third party actuary to assist us with evaluating the level of our insurance and litigation accruals.  Because of the high degree of judgment required in determining these estimated accrual amounts, actual future claim costs could differ significantly from our currently estimated amounts.

Income Taxes